WHY
CARS MATTER:
historically, the automobile industry was the "engine" of American
employment, producing 3 other industrial or service jobs for every
automotive manufacturing one. It also became the fabricator of
motorized materials for war; question...is this mighty economic
"driver" as extinct as T-Rex below?
TABLE OF CONTENTS TO
'ECONOMICS 101' HERE:





Another way of looking at global finance...
Lending new mean
to the term "F.I.R.E." sale?
ECONOMICS
101: where did crisis start? Or here? And what impact
do you think shrinking consumption will have?
Housing Industry predictor. What are the possible futures for the greenback? VAT tax
coming?
- Breaking
News on our economic situation
- OBAMA
@100days on...as we say across the pond - click
here. U.S.A.'S bail-out tab as of February
2009 (NYTimes)
- CREDIT-DEFAULT
SWAPS TUTORIAL
- Regulation
of new instruments, such as
derivatives and credit-default swaps, coming? What is a "dark
pool?"
- How
about plain, ordinary delinquencies?
- INDUSTRIAL
RESTRUCTURING:
- Manufacturing
jobs: is anything "made in
America" anymore?
- THE
BUDGET: How big is the deficit...soooooo big. And the economy is shrinking, too. Or is it? It is
just in our heads...
- STIMULUS: positive
or negative variety? TAXES GOING UP;
- Class warfare
beginning? Numbered accounts in
Switzerland under attack;
- Structure of
unemployment; how about UNDER-EMPLOYMENT?
Unemployment 1993-2009, U.S.A. and
Europe.
- Real Estate,
non-residential - more
specific tale of big time real estate developer here. housing story here;
- Other
sectors than "economics
101 (cars)",
which inspired this sub-page. Internationalization
of G.M.? How about "free trade" in a down
environment?
- About interest
rates:
from across
the pond; inflation?
- "Meltdown
101"
and Supply and Demand 2008; 401k into 201k
problem, in NYTIMES.
- Ponzi schemes:
“' ...a
classic
case of overconfidence as a mask for underconfidence. It’s Freud 101.'”
LINKS to more - we are trying to show
how this matter links to other
parts of various threads of the story of the world economy, US
elections, etc.: Madoff here
and here.
- or
whenever...as
the world turns.




THE
PULSE OF ECONOMIC DATA IN THE USA...it is electric...or is it?
How about elsewhere? How about trying new ideas for taxing?
Apology
Toyota probes Corolla
steering, considers recall
YAHOO
By YURI KAGEYAMA, AP Business Writer
Feb. 17, 2010
TOKYO – Toyota is considering a
recall of its hot-selling Corolla subcompact after complaints about
power steering problems — another blow to the world's largest automaker
already reeling from a string of recalls for safety troubles.
Despite pressure from some
lawmakers, President Akio Toyoda said he won't be attending the U.S.
congressional hearing on the automaker's quality lapses, entrusting the
job to U.S.-based executives — though would consider an appearance if
the committee requests it. He said he wanted to focus on improving
quality worldwide.
"I trust that our officials in the
U.S. will amply answer the questions," Toyoda said Wednesday in his
third news conference in two weeks. "We are sending the best people to
the hearing, and I hope to back up the efforts from headquarters."
He said Yoshi Inaba, who heads
Toyota Motor Corp.'s North American unit, was more familiar with the
U.S. situation and was the best executive to deal with the hearing.
Toyoda said he was still making plans to go to the U.S. and dates have
yet to be set.
But in an alarming disclosure that
could widen Toyota's recall crisis, the executive in charge of quality
controls, Shinichi Sasaki, said Toyota was taking seriously the
complaints about power-steering problems in the Corolla, the world's
best-selling car.
Speaking at Toyota's Tokyo office,
Sasaki said the company was putting customers first in a renewed effort
to salvage its reputation and would do whatever is necessary if a
Corolla fix is needed.
He said it was still uncertain if a
Corolla recall would be necessary, but it is an option the automaker is
considering.
He didn't disclose model years or
regions that could be affected and said there have been fewer than 100
complaints. Toyota sold nearly 1.3 million Corolla cars worldwide last
year.
Drivers may feel as though they were
losing control over the steering, but it was unclear why, Sasaki said.
He mentioned problems with the braking system or tires as possible
underlying reasons for the steering problem.
U.S. federal safety officials have
also said they are examining complaints from Corolla owners about
steering problems.
Toyota has already recalled 8.5
million vehicles globally during the past four months because of
problems with sticking gas pedals, floor mats trapping accelerators and
faulty brake programming.
Its once pristine reputation for
quality has been hammered, and Toyota's share of the critical North
American market has nose-dived. Last month was the first time since
February 1998 that Toyota's monthly U.S. sales fell below 100,000
vehicles, according to Ward's AutoInfoBank.
Koji Endo, managing director at
Advanced Research Japan, said the Corolla problems, if they expand into
a recall, would deal another major blow to Toyota.
"If Toyota has to recall Corollas, I
wouldn't be surprised if they have to recall more than a million units
again. It's going to be another big, big negative," said Endo.
But others said Toyota was sending a
message it was going to be quick and thorough about maintaining quality.
"It really shows the company has
learned its lesson from the recall debacle by starting to announce
every investigation far more quickly," said Ryoichi Saito, auto analyst
at Mizuho Investors Securities Co. in Tokyo.
Analysts had mixed views about
Toyoda's reluctance to show up at Congress — some critical but others
saying it was OK.
Unlike Western chief executives,
Japanese presidents are not always expected to be an authoritative
figure and play more of a team leader role in a culture that values
harmony and consensus. That role is even more pronounced for Toyoda,
the grandson of the company's founder who holds special significance
for rank-and-file workers and dealers in Japan.
The U.S. House Oversight and
Government Reform Committee is holding a hearing on Feb. 24 on Toyota's
gas pedal problems. The House Energy and Commerce Committee has
scheduled one the next day.
Inaba, Transportation Secretary Ray
LaHood and NHTSA Administrator David Strickland are expected to testify
at both meetings. The Senate Commerce, Science and Transportation
Committee has scheduled a March 2 hearing.
At Wednesday's news conference, a
solemn Toyoda reiterated his promise beef up quality controls at the
world's No. 1 automaker.
He promised a brake-override system
in all future models worldwide that will add a safety measure against
acceleration problems that are behind the recent massive recalls. The
system is a mechanism that overrides the accelerator if the gas and
brake pedals are pressed at the same time.
"We are not covering up anything,
and we are not running away from anything," Toyoda said.
The automaker said it was also
dealing with questions about whether the gas pedal flaw was electronic
and reiterated its investigation has not found any electronic problems.
But it has commissioned an
independent research organization to test its electronic throttle
system, and will release the findings as they become available.
Scrutiny of Toyota is growing. The
U.S. Transportation Department has demanded Toyota hand over documents
related to its massive recalls. The department wants to know how long
the automaker knew of safety defects before taking action.
Reports of deaths in the U.S.
connected to sudden acceleration in Toyota vehicles have surged in
recent weeks, with the alleged death toll reaching 34 since 2000,
according to new consumer data gathered by the U.S. government.
Toyota told NHTSA in January that
the problem appeared in Europe beginning in December 2008. Toyota has
said it began fixes on that in August 2009, but the company failed to
link that with gas pedal problems in the U.S., which surfaced in
October 2009.
Toyota took full-page ads in major
Japanese newspapers Wednesday to apologize for the recalls in Japan,
which affect the flagship Prius hybrid and two other hybrid models.
"We apologize
from the bottom of our hearts for the great inconvenience and worries
that we have caused you all," the black-and-white ads say.
Previously...
Government-Owned GMAC Loses $5 Billion
in 4Q
NYTIMES
By THE ASSOCIATED PRESS
February
4, 2010
Filed at
9:15 a.m. ET
DETROIT (AP) -- Home and auto lender GMAC Financial Services says it
lost $5 billion in the last three months of the year, as losses from
its mortgage operations kept the company in the red for another quarter.
GMAC is still working to sell its ResCap home lending division. The
unit alone lost more than $4 billion during the quarter. GMAC also took
a $3.3 billion charge related to its efforts to sell the unit.
GMAC's fourth-quarter loss compares with a profit of $7.5 billion in
the same quarter last year.
The federal government has poured $16.3 billion into GMAC to keep it
afloat and is now its majority owner. The lender has been battered by
the downturn in the housing market.
Page last updated at 23:42 GMT,
Friday, 19 February 2010
General Motors
boss Whitacre to receive $9m pay package
Mr Whitacre will receive considerably
more than his predecessor
|
General Motors (GM) has said chief executive
Ed Whitacre will get an annual salary of $1.7m (£1.1m), plus
$7.3m in shares at a later date.
The pay package was approved by the US Treasury, which spent
billions of dollars bailing out the carmaker last year and now owns a
large stake in it.
GM also said Mr Whitacre's predecessor, Fritz Henderson, is
being paid $59,090 a month as an adviser.
Mr Whitacre took over as interim chief executive in December
last year.
Last month, he was officially confirmed in the position on a
permanent basis. He is also chairman of GM.
Mr Whitacre was appointed chairman by the US administration
last year, having previously run telecoms company AT&T.
His salary compares favourably with that of his predecessor.
In an agreement reached last October with the US government, Mr
Henderson's pay was cut by 25% to $950,000, about half of what he made
in 2008.
Collapsing sales during the economic downturn forced GM to
turn to the US government for aid, but this could not prevent it
entering bankruptcy protection in June last year.
It emerged from bankruptcy one month later, with the US
government owning a 62% stake in the company.
In total, GM received some $60bn in government loans.

AP Source: GM Chairman to
become permanent CEO
YAHOO
By TOM KRISHER, AP Auto Writer
January 25, 2010
DETROIT – General Motors Co.'s
chairman and interim chief executive, Ed Whitacre Jr., will become the
permanent CEO of the automaker, a person briefed on the matter said
Monday.
The announcement will be made at an
11:30 a.m. Eastern news conference at GM's downtown Detroit
headquarters, the person said.
The person, who asked not to be
identified because the announcement had not been made, said Whitacre
will say that he is taking the job for good, as well as give an update
on GM's business plan.
Whitacre, 68, is a former CEO of
telecommunications giant AT&T Inc.
He has been serving as interim CEO
since the board ousted former CEO Fritz Henderson on Dec. 1. GM had
hired a firm to conduct a global search for a successor.
Whitacre often says in a folksy
Texas drawl that he knows little about cars. But he's already shaken up
the company by hiring a new chief financial officer and transferring
the old one to China, firing the Chevrolet and Buick-GMC brand
managers, combining sales and marketing and consolidating control of
GM's core North American market under one executive.
He also seems impatient to spur the
plodding culture of GM, where decision by committee, an isolated upper
management and fear of risk produced mediocre cars for years.
He wants to increase GM's sales and
market share while shifting the company's focus to cars from trucks.
And he aims to repay $8.1 billion in U.S. and Canadian government loans
by the end of June.
Although GM had hired the search
firm, there were strong signs that Whitacre would take the job
permanently, or at least serve as CEO until the company is on solid
enough ground to sell stock to the public in an effort to repay its
government loans.
GM owes the U.S. government $52
billion that it used to survive and emerge from bankruptcy protection
last year.
At his first meeting with GM's top
executives after being named chairman last summer, Whitacre candidly
said he likes to be in charge.
"I don't know how to be a chairman
and not a CEO," a person at the meeting remembers Whitacre saying.
But he also has told employees and
reporters that he would rely heavily on former Wall Street analyst
Stephen Girsky and Vice Chairman Bob Lutz for advice in running the
company.
Whitacre didn't realize how hard it
would be to run the company as an interim CEO, and decided to take the
job himself, said Gerald Meyers, a former chairman of American Motors
Corp. who now teaches at the University of Michigan.
Having an interim CEO paralyzes the
organization because workers tend to lie low to wait for the permanent
boss, Meyers said.
"Therefore, his demands and requests
and requirements are watered down a lot," Meyers said. "He realized if
he's not going to run the joint, he shouldn't be there. So he finally
stepped up."
Jeffrey Sonnenfeld, a professor at
the Yale School of Management, said it was no secret that Whitacre
wanted the CEO job when Henderson was ousted. He said it would have
been difficult for anyone to take the post with Whitacre managing as
chairman.
"The only surprise is that he wasn't
transparent about his plans in the beginning. Why didn't he just assume
command then?" Sonnenfeld asked. "His ambitions were clear from the
beginning when he pulled the rug from beneath an extremely competent
CEO."
Henderson, Sonnenfeld said, was
leading a "remarkably, breathtakingly successful turnaround," yet was
relieved of his command.
Whitacre, he said, retired too young
and was looking for ways to spend his free time. Whitacre has said he
was passing time using a bulldozer to clear brush at his Texas ranch.
Meyers, who knows Whitacre, said the
move eliminates confusion among GM's ranks. And just because Whitacre
is dropping interim from his title doesn't mean the search for a new
CEO has ended.
"He doesn't have to stay forever —
but that's always the case," Meyers said. "Now it's indefinite. It
would be embarassing, two weeks from now, for him not be CEO. A decent
amount of time is going to go by."
Earlier this month the GM board
hired Microsoft Corp. CFO Chris Liddell to take the same post at GM,
and Whitacre said Liddell would be a candidate to take the CEO post
permanently.
Whitacre was chairman and chief
executive of AT&T and its predecessor companies from 1990 to 2007.
During his tenure, he led the company through several acquisitions and
sales.
Whitacre also sits on the boards of
Exxon Mobil Corp. and the railroad company Burlington Northern Santa Fe
Corp.
In a wide-ranging talk with
reporters at GM's Detroit headquarters earlier this month, Whitacre
predicted that GM would be profitable this year, although he said that
was dependent on the economy and other factors.
A full-year profit for GM, which
left bankruptcy protection in July, would be the company's first since
2004 when it made $2.7 billion. It has posted more than $88 billion in
losses since then.
Are you surprised?
GMAC to get $3.5 billion in added
aid from government: report
Wed Dec 30, 2009 2:51 am
ET
NEW YORK (Reuters) – GMAC Financial
Services is close to getting about $3.5 billion in added aid from the
U.S. government, on top of the $12.5 billion already received since
December 2008, the Wall Street Journal reported.
The announcement is expected within
days and will coincide with GMAC taking additional steps to absorb
losses related to its mortgage operations, the Journal reported, citing
people familiar with the situation.
One person told the Journal that the
measure has been crafted to return the company to profitability in the
first quarter of 2010.
The new capital will likely allow
GMAC to avert placing its ailing mortgage unit, Residential Capital
LLC, or ResCap, into bankruptcy, the Journal reported, citing these
people.
"As we have previously stated, GMAC
has been conducting a strategic review of its business and evaluating
options to address the challenges at ResCap and the mortgage
operations," said GMAC spokeswoman Gina Proia in an email statement.
"Critical objectives in the process
would be to take actions that position GMAC for improved financial
performance and to repay the U.S. government," she said.
GMAC did not detail any specific
actions.
Payback Time: Many See the
VAT Option as a Cure for Deficits
NYTIMES
By CATHERINE RAMPELL
December 11, 2009
Runaway federal deficits have thrust
a politically unsavory savior into the spotlight: a nationwide tax on
goods and services.
Members of Congress, like their
constituents, are squeamish about such ideas, instead suggesting
spending cuts or higher taxes on the rich. But with a lack of political
will to do the former, and a practical ceiling to how much revenue can
be milked from the latter, economists across the political spectrum say
a consumption tax may be inevitable once the economy fully recovers.
“We have to start paying our bills
eventually,” said Charles E. McLure, a tax economist who worked in the
Reagan administration. “This strikes me as the best and most obvious
way of doing it.”
The favored route of economists is
known as a value-added tax, which is a tax on goods and services that
is collected at every step along the production chain, from raw
material to a consumer’s shopping bag. Similar to a sales tax, it
generally results in consumers paying more for the things they buy. The
revenues could be used to pay for health care or other social programs,
or just to pay down existing debt.
Like universal health care, every
other industrialized country in the world already has a value-added tax
(as do about 100 emerging countries). And also like universal health
care, this once-taboo policy option has recently been invoked, at times
begrudgingly, by many prominent Washingtonians, including the House
speaker, Nancy Pelosi; John Podesta, who was co-chairman of President
Obama’s transition team; and two former Federal Reserve chairmen, Alan
Greenspan and Paul A. Volcker
Introducing such a tax would
probably require an overhaul of the entire federal tax code, no small
order, and something the government last did in 1986. At the time the
goal was to simplify the tax system, to raise money more efficiently
and with fewer headaches for taxpayers.
Since then, federal spending has
ballooned, while the government’s ability to raise taxes has become
increasingly inefficient. Consider the page length of the tax code and
tax regulations, which has expanded by more than 70 percent, according
to Thomson Reuters Tax and Accounting. (There are more words crammed
onto each page, too.)
The tax system is now a compendium
of lobbied-for ifs, ands and buts. As the tax code has been embellished
and then Swiss-cheesed, the portion of Americans footing the nation’s
income tax bill has shrunk.
“There are many more deductions and
credits, which can often encourage inefficient behavior such as tax
shelters,” said Leonard E. Burman, a public affairs professor at
Syracuse University, about the changes to the tax system since the 1986
reform. “The ideal tax system has a broad base — few deductions or
exemptions — and low rates.”
Most of the rest of the
industrialized world — including, most recently, Australia — has
already taken this lesson to heart by imposing value-added taxes.
Unlike income taxes, which are often front-loaded on the rich, then
subsequently diluted, a value-added tax is paid by almost everybody.
That broad base is one of its major advantages, and why the
International Monetary Fund frequently recommends it to countries that
need to raise money quickly.
What is good for economic purposes,
however, can be bad politics, especially since Mr. Obama pledged not to
raise taxes on the bottom 95 percent of Americans. (And many
Republicans have pledged not to raise taxes on the bottom 100 percent
of Americans.)
The value-added tax is also the
darling of many economists for its bounce-a-quarter-off-its-abs
efficiency. Its administrative costs to the government are generally
low. It is also considered less of a drag on the economy over the long
run than raising income taxes, which discourage people from saving
money and thereby making capital available to businesses.
To understand why a value-added tax
is considered so efficient, you have to understand how it usually works.
Imagine the production of a new
dress, in three steps:
¶A fabric store sells a tailor
enough silk to make one dress, at a total price of $10 before taxes;
¶The tailor sews a dress and
sells it to Macy’s for $30 before taxes;
¶Macy’s then sells the dress to
a shopper for $50, before taxes.
Let’s say the value-added tax is 10
percent. The government will collect some tax revenue in each step of
the production process, from roll of fabric to cocktail-party
scene-stealer, but each business in the chain gets credit for the tax
already paid by other suppliers.
When selling the cloth to the
tailor, the fabric store adds a tax of 10 percent, or $1 on the $10 of
supplies the tailor purchases. The tailor pays the fabric store $11,
and the store remits $1 to the government.
When the tailor sells his dress to
Macy’s, he calculates the value-added tax as $3, or 10 percent of his
$30 pretax price. Macy’s pays the tailor $33.
But instead of sending the full $3
to the government, the tailor gets to subtract the $1 of taxes he had
already paid to the fabric store. So he sends $2 to the government.
When Macy’s sells the dress to a
shopper, it adds another 10 percent, so the shopper pays $55, or $50
plus $5 in tax. That would be in addition to any state or local sales
taxes consumers have to pay, depending on the locale.
Macy’s checks to see how much the
previous companies in the supply chain — the fabric store and the
tailor — have already paid the government in value-added taxes, and
subtracts that from the $5. Macy’s ends up remitting just $2 to the
government.
The government receives $5 total, or
10 percent of the final purchase price, but from three different
businesses.
Although more complicated,
value-added taxes are considered better than equivalent sales taxes —
where the tax is levied only when the consumer buys a product — for two
main reasons.
First, if a single business evades
the value-added tax, the government does not lose a large portion of
money, because it will collect taxes at other stages of production.
Since companies usually get credit
for taxes already paid by their suppliers, companies will pressure
other businesses in the production chain to prove they paid their
taxes. That means the system is somewhat self-policing.
To some foes of big government,
though, the efficiency of the tax is also its fatal flaw. Conservatives
worry that it enables the government to raise money with such little
effort that it will encourage Washington to spend even more.
On the other hand, liberals are wary
of value-added taxes because they are regressive. Poor people spend a
higher portion of their income buying things than the rich, meaning
lower-income people would be disproportionately hurt.
That is why countries often make
other major changes to their tax code at the same time.
In Australia, the government imposed
a value-added tax in the middle of an overhaul of the system in 2000,
which included making the income tax system more progressive. “Many
countries with VATs have income taxes that start out at higher income
thresholds,” said James Poterba, an economics professor at M.I.T.
Combining a broad-based VAT with a steeply progressive income tax, he
said, avoids affecting the poor too much.
But just as the income tax has been
hollowed out by countless loopholes, so could a value-added tax. Many
European countries, for example, have counteracted the regressive
qualities of the tax by exempting broad categories of goods, like
groceries and children’s clothing.
This always creates problems,
economists say. Companies are tempted to mislabel their products so
they can avoid the tax.
“What really is the difference
between prepared food versus nonprepared food?” said Alan J. Auerbach,
an economics professor at the University of California, Berkeley. “You
start having to split hairs, and that can become quite complicated.”
Besides cheating the government of
revenue, this sort of behavior also distorts what people choose to buy,
causing a drag on economic development, Mr. Auerbach said.
Moreover, in some industries — like
financial services — it is difficult to evaluate how much value is
added because of the way they make their money.
The solution in many places, like
New Zealand, is to exempt the financial services industry. But that
might not go over well in a country whose federal debt has recently
swelled precisely because of a major banking crisis.
Such political hurdles, along with a
still-tentative economic recovery, make a consumption tax — or a tax
increase of any kind — unlikely in the immediate future. But with
economists like Kenneth Rogoff of Harvard predicting that federal tax
revenues will need to rise by 20 to 30 percent in the next few years,
politicians may hold their noses and decide this tax is the least worst
option.
“Of course, we want to take down the
health care cost, that’s one part of it,” Ms. Pelosi told Charlie Rose
of PBS. “But in the scheme of things, I think it’s fair to look at a
value-added tax as well.”
Click
below to follow this Global Business story...
Dubai debt fears hammer stocks
YAHOO
By Jeremy Gaunt, European Investment Correspondent
November 26, 2009
LONDON (Reuters) – Debt problems in
Dubai hit financial markets across the board on Thursday, sinking
global stocks, helping lift safe-haven bonds and taking the dollar up
from a 14-year low against the yen.
Gold climbed to a new record high
but fell back as the dollar rose.
Banking stocks came under pressure
because of potential exposure to any bad debt in the Gulf, as did
shares in European car companies, some of which are part-owned by
sovereign wealth funds from the region.
Markets were also trading without
much input from the United States, where it was the Thanksgiving
holiday.
Dubai said on Wednesday it wanted
creditors of Dubai World and property group Nakheel to agree a debt
standstill as it restructures Dubai World, the conglomerate that
spearheaded the emirate's breakneck growth.
The announcement triggered
widespread concern about the once-booming Gulf region's financial
health, although some investors differentiated between leveraged Dubai
and other more solidly wealthy emirates and countries in the region.
But the worries fed directly into a
general nervousness in financial markets about the real state of the
world economy at a time when investors are also seeking to lock in 2009
profits.
"The Dubai story is weighing heavily
on stock markets and people are looking to safe havens so there's some
flight to quality again," said Charles Berry, a bond trader at LBBW.
Others, such as Royal Bank of
Scotland, said Dubai's bombshell meant investors would now have to
"re-appraise the quality of sovereign support for state-owned entities
in the region."
Dubai sought to ease some concerns
about international port operator DP World (DPW.DI), saying its debt
was not included in the restructuring.
But markets stayed nervous and the
cost of insuring debt through credit default swaps around the Gulf rose.

GM to end Hummer after sale to Chinese buyer fails
By DAN
STRUMPF, AP Auto Writer
Feb. 24, 2010
DETROIT – General Motors Co. said Wednesday it will shut down Hummer
after its bid to sell the brand to a Chinese company collapsed.
Heavy equipment maker Sichuan Tengzhong Heavy Industrial Machines Co.
pulled out of the deal for Hummer, known for its hulking,
military-style SUVs, because it was unable to get clearance from
Chinese regulators within the proposed deal timeframe, the manufacturer
said in a separate statement.
GM said it will continue to honor existing Hummer warranties.
"We are disappointed that the deal with Tengzhong could not be
completed," said John Smith, GM vice president of corporate planning
and alliances. "GM will now work closely with Hummer employees, dealers
and suppliers to wind down the business in an orderly and responsible
manner."
GM has been trying to sell the loss-making brand for the last year and
found a suitor in Tengzhong, but resistance from Chinese regulators
created difficulties from the start.
As recently as Tuesday, private investors were trying to set up an
offshore entity in a last-minute effort to complete the acquisition
ahead of a Feb. 28 deadline. That plan, along with other options, was
unsuccessful, according to a person close to the situation. The person
declined to be identified in order to speak more freely.
"There's no way forward with that," this person said. "We're out of
time."
Hummer, which traces its origins to the Humvee military vehicle built
by AM General LLC in South Bend, Ind., acquired a devoted following
among SUV lovers who were drawn to the off-road ready vehicles. But the
vehicles drew scorn from environmentalists and sales never recovered
after gasoline prices spiked above $4 a gallon in the summer of 2008.
The H3, the most fuel-efficient vehicle in Hummer's lineup, averages
about 16 mpg. The vehicles are built at GM's factory in Shreveport, La.
GM sold just over 9,000 Hummers in 2009, down two-thirds from 27,000
the year before.
Hummer is the second brand after Saturn that GM has failed to sell as part of its
restructuring. GM sold Swedish brand Saab to Dutch carmaker Spyker Cars
NV earlier this year. Pontiac is being discontinued.
GM is focusing its efforts on its four remaining brands: Chevrolet,
GMC, Cadillac and Buick.
GM, Tengzhong reach Hummer deal
YAHOO
By Matt Andrejczak, MarketWatch
Oct. 9, 2009, 2:17 p.m. EDT
SAN FRANCISCO (MarketWatch) --
General Motors Co. said Friday it has clinched a definitive agreement
to sell its Hummer brand to Chinese firm Sichuan Tengzhong Heavy
Industrial Machinery Corp.
The deal, which still needs to be
approved by regulators in the U.S. and China, is expected to preserve
more than 3,000 sales and manufacturing jobs in the U.S.
Tengzhong will acquire ownership of
the Hummer brand, trademarks, and assume existing dealer network
agreements. GM will continue to manufacture the military-styled sports
utility vehicle until June 2011, with an optional one-year extension.
The purchase price was not
disclosed. Tengzhong will acquire Hummer through an investment entity,
in which it will hold an 80% stake. Private entrepreneur Suolang Duoji
from China's Sichuan Province will own the remaining 20%.
When GM made its quick trip through
bankruptcy this summer, the auto maker indicated that Hummer could
fetch $500 million or more. Before the sale was officially announced,
Reuters and Bloomberg, citing sources familiar with the deal, said
Hummer would sell for about $150 million.
Tengzhong said in June that it had
struck a preliminary deal to take over Hummer, the civilian version of
a vehicle built for U.S. military use. Tengzhong makes heavy trucks and
industrial equipment.
The state of Michigan has offered
tax breaks for Hummer to build its headquarters, design and engineering
facility in the Detroit suburb of Southfield.
The H2 Hummer is assembled in
Indiana, while the H3 is made in Louisiana.
The outsized SUV hit hard times when
fuel prices began to escalate and the economy cratered. Hummer's
smallest model gets only 16 miles per gallon in combined city and
highway driving. Sales took a big hit when gasoline prices topped $4 a
gallon and came under renewed pressure as the economy tumbled into
recession.
Through September, GM had sold only
8,193 Hummers in the U.S. this year, down 64% from the same period last
year. In September, only 426 Hummers were sold nationwide, according to
Autodata Corp.
Design changes are afoot to make the
Hummer more fuel-efficient.
Hummer said it will offer an
alternative fuel powertrain in every model and add E85 FlexFuel
capability in the 2010 H3 and H3T models. The SUV maker also said it's
working to get certified for a diesel H3 to be sold outside North
America.
"Backed by a privately owned and
well-capitalized company, we are going to be able to focus on providing
customers with more efficient models that deliver Hummer's promise of
authentic, purpose-built design and engineering," Hummer CEO James
Taylor said in a prepared statement.
As part of its restructuring, GM
slimmed down to focus on the Chevrolet, GMC, Buick, and Cadillac
brands. Saturn and Hummer are among the four brands GM planned to
eliminate or sell.
Last week, GM's deal to sell its Saturn
brand to Penske Automotive Group fell apart when Penske failed to
line up a replacement manufacturer. GM now plans to shut down the brand.




"You should never see how laws or sausages
are made."
This is the version I am
familiar with - a quote from almost EVERYBODY, originally attributed,
in dispute on Wikipedia, to Otto von Bismarck!!! AND IT IS SO
TRUE...of course, if you didn't watch the CT Legislature on TV, you
would have no way of knowing how hard they work! Or how closely
the Majority listens to the Minority (photo from newspapers,
above). UBS underattack? All Greek to
us!
Page last updated at 14:32
GMT, Thursday, 4 March 2010


Only 227 of Greece's 6,000 islands are inhabited
Greece should sell islands to
cut debt - Merkel allies
|
By Oana Lungescu , BBC News, Berlin
|

Greece should consider selling some of its
uninhabited islands to cut its debt, according to political allies of
German Chancellor Angela Merkel.
Josef Schlarmann and Frank Schaeffler told Germany's Bild
daily that the Greek state should sell stakes in all its assets to
raise more cash.
Greek PM George Papandreou is due to meet Mrs Merkel in
Berlin later this week for talks about the crisis.
Mr Papandreou has already announced a strict austerity
programme.
'Affordable' islands
"Sell your islands, you bankrupt Greeks - and the Acropolis
too!" says the headline in the Bild newspaper.
It sounds like the sort of daydream induced by too much ouzo,
but the idea comes from two senior politicians in Europe's biggest
economy.
Mr Schlarmann is a senior member of Mrs Merkel's Christian
Democrats and Mr Schaeffler is an MP for the Free Democrats - the
junior partner in the centre-right coalition.
Both confirmed to the BBC that they wanted to start a debate
about what Greece could do to help itself and bolster the battered
euro.
Those who face insolvency, Mr Schlarmann said, must sell
everything they have to pay their creditors.
He advised Mrs Merkel not to promise any financial aid when
she met Mr Papandreou in Berlin.
According to a poll published on Thursday, 84% of Germans
think that the EU should not help Greece out of its debt crisis.
It is true that dotted in the blue waters of the Aegean are
some of the country's most valuable assets - about 6,000 islands, of
which only 227 are inhabited. Many of them are privately owned by the
world's super-rich.
According to a specialised real-estate website, Greek islands
evoke images of sunglass-sporting shipping magnates sipping champagne
on enormous yachts, but cost as little as $2m (£1.3m).
Relatively affordable, the website says - unless, of course,
you're a Greek.
Europe Union Moves Toward a Bailout of
Greece
NYTIMES
By STEPHEN CASTLE and LANDON THOMAS Jr.
March 1, 2010
BRUSSELS — In a tense game of brinksmanship, the European Union is
moving toward the first bailout in the history of its common currency,
which is expected to involve loan guarantees from the German and French
governments to encourage their banks to buy Greek debt.
Even as the negotiations continue, the bloc is insisting that Athens
impose further, painful austerity measures, in part to overcome
political opposition in Germany to providing aid to the spendthrift
Greeks.
During a brief visit, due to start Monday, Olli Rehn, the European
commissioner for economic and monetary affairs, will press for more
spending cuts and tax increases in Greece as a precursor to an emerging
package of financial support.
With no structure in place for dealing with a threatened default within
the 16-nation euro zone, officials are making up the rules as they go
along. That means that politics — as much as economics — is determining
the outcome of the worst crisis in the decade-long lifespan of the
euro, creating a kind of phony war in which battles are being fought by
leaks and behind-the-scenes briefings.
European officials say that the purchase of Greek bonds by state-owned
lenders like Germany’s KfW — backed by German government guarantees —
is likely to be involved in any solution and has been an option under
discussion for three weeks.
Other alternatives, including ones that involve more countries in the
euro zone, are also being discussed. France’s state-owned bank Caisse
des Dépôts et Consignations, may be involved, one Greek
newspaper reported Saturday, while France’s Finance Minister. Christine
Lagarde, told Europe 1 radio on Sunday that there are “a certain number
of proposals in the euro zone, involving either private partners or
public partners or both.”
But Germany’s Chancellor, Angela Merkel, is not ready to sign off on a
rescue, officials said, before Greece has pushed through further cuts.
One European official, speaking on condition of anonymity because of
the sensitivity of the subject, said that Greek officials appeared to
be briefing journalists on the prospect for an big rescue package in
the hope of pushing the European Union into a quick solution, or of
convincing the markets that help is at hand.
“The Germans will not put a euro on the table until there is a credible
austerity package,” the official said.
Simon Tilford, chief economist at the Center for European Reform, said
that France and Germany recognize that some form of bailout is
inevitable, but that, to enable a bailout to be sold to a skeptical
German public, the Greeks first “have to be seen to be suffering.”
Much of the negotiating focuses on the Greek prime minister George
Papandreou. On Friday, Mr. Papandreou met with Josef Ackermann, the
chairman of Deutsche Bank, in Athens; on March 5 he plans to visit Mrs.
Merkel in Berlin. He also is scheduled to meet President Obama in
Washington on March 9.
Lurking behind the discussion are a variety of power plays involving
Brussels, Paris, Berlin and Athens. Germany is reluctant to sanction
any bailout knowing that, as the euro zone’s biggest economy, it will
bear the brunt of the cost. But France and Germany also believe that
any recourse by Greece to the International Monetary Fund would damage
the prestige of the euro, highlighting its inability to sort out
internal problems.
Moreover, France’s president, Nicolas Sarkozy is said to be
particularly reluctant to see a rescue orchestrated by the monetary
fund, which is led by Dominique Strauss-Kahn, a Frenchman and a
potential rival in the next presidential elections.
Precisely that threat is being made privately by Greek officials,
according to one European diplomat, who spoke on condition of anonymity
due to the sensitivity of the issue.
The Greek government can be pushed only so far, said Daniel Gros,
director of the Center for European Policy Studies.
Such brinkmanship on both sides was brought about by the lack of
clarity from an European Union summit earlier this month when leaders
promised “determined and coordinated action” if needed to protect the
euro’s stability.
Refusing to specify what this would be, European leaders sought to
inject more rigor into Greece’s budget deficit reduction program.
Having concealed its true economic situation and largely squandered the
proceeds of the good economic years, Greece is not seen as a deserving
cause in Berlin.
“Germany has, in the last 10 years, been through very painful social
reform which mean curtailing rights and social benefits and pushing
back the retirement age,” said Thomas Klau of the European Council on
Foreign Relations and author of a book on the birth of the euro. “The
argument in Germany is ‘why should our workers work to the age of 67 to
enable Greeks to retire earlier?’”
But Mrs. Merkel is under equally strong pressure from her European
partners to protect the euro from the consequences of a Greek default.
“She has to show leadership,” Mr. Klau said, “in taking and pushing
through a decision which is unpopular with her electorate and much of
her party and is not backed wholeheartedly by her junior coalition
party”.
Already the Greeks have agreed to freeze wages, cut bonus, crackdown on
tax evasion and raise the official retirement age. But European
officials have made it clear that they do not believe these measures go
far enough to narrow Greece’s budget deficit. Athens is now weighing an
increase of two percentage points in the 19 percent value-added tax,
higher fuel prices and the possible abolition of one of two additional
months of pay received by public sector workers and by employees of
many private firms.
The new austerity package is likely to be announced after Mr. Rehn’s
visit to Athens but well in advance of a crucial meeting of European
finance minister on March 16.
For weeks now the Greek government, which faces 23 billion in debt
repayments in April and May, has been testing investor’s diminishing
appetite for its bonds via a 3 to 6 billion euro ($4 billion to $8
billion) 10-year offering that it had hoped to bring off at an interest
rate in the 6 percent range. That would be well above the roughly 3
percent rate investors receive on German bonds but not as costly as the
7 percent or so rate that some investors claim is necessary to
compensate them for the extra risk of buying Greek bonds.
The offering itself is fairly small. But its significance for Europe
and the bedraggled euro is far greater.
“I see this as a game of chicken between the markets and the German
finance ministry,” Mr. Gros said.
Greece is pressing for a much detail as possible on rescue
contingencies to ensure that it will be get some relief from the attack
in the markets for imposing a harsh plan on its restive public.
Greek officials have privately pointed out that, when a country goes to
the International Monetary Fund, it gets protection from the markets
until its economy has stabilized.
For example, in November 2008 when Hungary went to the monetary fund it
received a stand-by loan worth about euros 12.3 billion, then $15.7
billion, of which euros 4.9 billion or $6.3 billion was on tap
immediately and the remainder available in five installments subject to
quarterly reviews.
Without similar help the Greek austerity drive might prove
counterproductive.
“Cutting public spending by this amount,” Mr. Tilford said, “when there
is no other source of demand in the economy, when export demand is
extremely weak and the country is running a huge current account
deficit, is almost certain to push their economy into a slump.”
Without the I.M.F., the only credible source of support to ease the
shift in fiscal policy in Greece are the other European governments
that rely on the euro as well.
“The Greeks are in a bad position,” Mr. Tilford said, “but their
bargaining power is stronger than some governments concede. If the euro
zone doesn’t come up with something they will have little option but to
go to the I.M.F.”
SEC
examines destabilizing effects of CDS
YAHOO
Feb. 25, 2010
WASHINGTON (Reuters) – Securities regulators said on Thursday they are
examining the potential abuses and destabilizing effects of credit
default swaps, a financial instrument that can be used to speculate on
an issuer's credit worthiness.
The Securities and Exchange Commission comments come after Federal
Reserve Chairman Ben Bernanke said regulators were looking at how
Goldman Sachs (GS.N) and other Wall Street companies helped Greece
arrange derivative deals.[nN25251885]
The SEC would not confirm or deny it was investigating Goldman's role
in Greece.
"As an agency, we have been examining potential abuses and
destabilizing effects related to the use of credit default swaps and
other opaque financial products and practices," SEC spokesman John
Nester said.
Goldman had no comment.
It
is unclear what regulators are examining regarding Goldman's
dealings with Greece. Bernanke did not specify.
The SEC has said it has more than 50 probes involving credit default
swaps, collateralized debt obligations and other derivatives-based
instruments.
The SEC has already expanded some of its insider trading investigations
to examine derivatives and credit default swaps.
Used to insure against the default of debt issuers, credit default
swaps were blamed for exacerbating the financial crisis by spreading
losses from bets on risky mortgages and other debt.
Because swaps and other over-the-counter derivatives are not traded on
a central exchange, regulators cannot monitor their activity for any
potential wrongdoing.
Congress is working on legislation to shed light on the $450 trillion
private derivatives market. This legislation is currently stalled in
the Senate.
The SEC said any derivatives legislation should ensure that
securities-based swaps are regulated as strongly as the security that
underlies the swap.
The agency also said Congress needs to give it the tools needed to
police the markets and shed light on the opaque market.
(Reporting by Rachelle Younglai; editing by Carol Bishopric)
Fed to look into insurance
contracts on Greek debt
YAHOO
By JEANNINE AVERSA, AP Economics Writer
Feb. 25, 2010
WASHINGTON – Federal Reserve Chairman Ben Bernanke told lawmakers
Thursday that the central bank is looking into the use by Goldman Sachs
and other Wall Street firms of a sophisticated investment instrument to
make bets that Greece will default on its debt. Bernanke said the
Fed is looking into companies' use of credit
default swaps, a form of insurance against bond defaults. Bernanke
made the comments at the start of a Senate Banking Committee hearing,
the second day where the Fed chief testified on Capitol Hill about the
state of the economy.
"Obviously, using these instruments in a way that intentionally
destabilizes a company or a country is counterproductive, " Bernanke
said, adding that the Securities and Exchange Commission probably will
be looking into this matter as well.
"We'll certainly be evaluating what we can learn from the activities of
the holding companies that we supervise here in the U.S," Bernanke said.
The panel's chairman, Sen. Christopher Dodd, D-Conn., said he is
troubled that this practice could worsen Greece's debt crisis.
"We have a situation in which major financial institutions are
amplifying a public crisis for what would appear to be for private
gain," Dodd said.
Dodd wondered whether there ought to be limits on the use of credit
default swaps to prevent "the intentional creation of runs against
governments."
On another topic, Bernanke said that the snowstorms and bad weather
that have recently affected the country will likely have a short-term —
but not permanent — impact on unemployment and layoffs. He said
policymakers will "have to be careful about not overinterpreting"
upcoming data.
Even though the economy is growing once again, senators on both side of
the aisle worried about high unemployment — now at 9.7 percent — rising
home foreclosures and difficulties people and businesses have in
getting loans.
"The state of our economy as a whole may be improving, but if we're
talking about the situation of ordinary American families, I think I
can sum up this recovery in three words: not good enough," Dodd said.
Senators pressed Bernanke for ideas about what Congress can do to help
out, especially in bringing down unemployment. The Senate on Wednesday
approved a package aimed at generating jobs by giving companies a tax
break for hiring the unemployed. Bernanke shied away from
providing recommendations but did say that if additional stimulus
measures are approved, it would be "very constructive" to pair them
with a plan on how the government intends to lower record-high deficits
down the road.
On the economy, Bernanke repeated the message he delivered Wednesday to
the House Financial Services Committee: that record low interest rates
are still needed to make sure that the budding economic recovery is
lasting and to help relieve high unemployment. And, Bernanke
again argued against Senate efforts to strip the Fed of its powers to
regulate banks, saying such a move would be a "grave mistake."
Doing so, would deprive the Fed of information that factors into the
setting of interest rates to influence overall economic activity, he
said. Bernanke also argued that the Fed would lose insights into the
health of not only individual banks but also of the entire banking
system.
Dodd has wanted to rein in the Fed's power and remove it from
overseeing banks as part of a broader legislative revamp of the
nation's financial structure. That conflicts with the Obama
administration's stance as well as the approach taken by House
lawmakers in their financial overhaul bill.
Page last updated at 13:11
GMT, Wednesday, 3 March 2010
Greece backs new
round of tax rises and spending cuts
Greece has been hit by a wave of public
sector strikes
|
The Greek government has approved a new package
of tax rises and spending cuts to save 4.8bn euros ($6.5bn;
£4.4bn) and ease its budget crisis.
The measures include a rise in sales and luxury taxes, a 30%
cut in the holiday bonuses paid to civil servants, and a pensions
freeze.
The EU had called for austerity measures amid fears that
Greece's problems could undermine the eurozone.
PM George Papandreou has likened the budget crisis to a
"wartime situation".
 |
ANALYSIS
By Malcolm Brabant, BBC News, Athens
In a country with Byzantine financial
practices, one of the more idiosyncratic traits of Greek employment law
is the requirement that workers receive their annual remuneration in 14
segments.
The methods vary, but in principle, employees get a
full month's extra wages at Christmas, an extra half month's salary to
help during the summer holiday period, plus another half month's salary
at Easter.
The bonuses carry great symbolic value in Greece, but
the European Commission has urged the government to scrap them for
civil servants.
Some of the cabinet have been reluctant to do so, not
least because of strong opposition from trades unions. The unions fear
that any reduction in the bonuses will not be just for the duration of
the crisis but will be permanent.
The main civil service union has called a 24-hour
strike on 16 March.
|
He told reporters: "These decisions are necessary for the
survival of the country and the economy, so that Greece can exit the
vortex of speculators and defamation, so that we can breathe and keep
on fighting."
The socialist government has pledged to reduce Greece's
budget deficit from 12.7% - more than four times the limit under
eurozone rules - to 8.7% during 2010.
It is also seeking to reduce its 300bn euro ($419bn;
£259bn) debt.
Correspondents say businesses in Greece are likely to react
badly to further tax increases, as they see them as being
counter-productive, discouraging consumer spending and contributing to
a further downward spiral.
There have already been strikes by trades unions in protest
against the government's cost-cutting plans.
And Panayiotis Vavouyios, head of the retired civil servants'
association, said: "It is a very difficult day for us. These cuts will
take us to the brink.
"Brussels is demanding cuts and the government is doing
nothing to stop them. To make poor pensioners pay for this crisis is a
disgrace."
The German government welcomed the additional Greek austerity
measures, saying they were likely to inspire confidence in Athens.
Transport strikes lay bare
Europe's malaise
YAHOO
By JAMEY KEATEN, Associated Press Writer
Feb. 23, 2010
PARIS – With economic recovery barely there and talk of austerity
spreading, many European workers are pushing back.
French air traffic controllers walked off the job Tuesday just as
Lufthansa pilots ended a strike and British Airways cabin crews voted
to launch one of their own. Greek unions prepared to shut down much of
their country Wednesday with wide-ranging strikes.
These workers — like those blockading the Athens stock market, and
demonstrators angry at proposed delayed retirements in Spain — fear for
their hard-earned comforts as European governments and companies
tighten belts to stay solvent.
The walkouts are the latest signs of a broader unease about jobs and
benefits, and what the future holds for a continent struggling to stay
competitive on a global scale.
From Communist-backed protesters who blocked the Athens stock market
Tuesday to labor unions angry at plans to require Spaniards to retire
at 67 instead of 65, Europeans face the unsettling prospect of seeing
some of the comforts and benefits won over the decades slip away.
Air traffic controllers walked off the job across France as a four-day
strike began on Tuesday, testing the patience of would-be travelers and
forcing the cancellation of hundreds of flights. Unions called the
walkout to protest plans to integrate European air traffic control
across six countries — which workers fear will lead to losses of jobs
and civil servant benefits.
Workers and unions say they are digging in to protect the European
social safety net from fraying and to keep austerity measures from
sapping consumer demand and thus the economy.
"The dangers of pricing oneself out of a job have nowhere been more
apparent than they are today," said Howard Wheeldon, a senior
strategist at inter-dealer broker BGC Partners in London.
"The solution is ... for companies to be even more efficient and that
of necessity means employing fewer staff," said Wheeldon. That's what
managers at British Airways and Lufthansa are facing, he said.
Thousands of Lufthansa pilots resumed work Tuesday after suspending a
strike over concerns that cheaper crews from the German carrier's
smaller airlines in other countries could replace them one day. Big
European carriers have been pummeled in recent years by high jet-fuel
prices, competition from low-cost rivals and falling demand for first-
and business-class tickets — where profit margins are higher.
"Cost pressure has always governed airlines," said Per-Ola Hellgren, an
analyst at Germany's Landesbank Baden-Wuerttemberg. "The pressure is
much greater than in the past. The conditions were never really great
and now they're worse than ever."
While airline workers face market pressures, the air traffic
controllers are subject to a government push for efficiencies at a time
of high state deficits and lackluster economic conditions.
Eric Heraud, a spokesman for the French state-run civil aviation agency
DGAC, suggested the controllers are acting out of fear.
"This strike is a little bit disproportionate," because the French
government is committed to keeping workplace protections, he said.
Heraud said labor unions representing controllers in the five partner
nations — Belgium, Germany, Luxembourg, the Netherlands and Switzerland
— all supported the integation plan.
The malaise about pending government cutbacks and efficiency-seeking
extends beyond the air travel sector.
In Spain, labor unions have called protest rallies for Tuesday evening
in Madrid, Barcelona, Valencia and other cities to protest a government
plan to raise the retirement age from 65 to 67 age as part of an
austerity package. Greek unions are calling a wide-ranging strike for
Wednesday to protest austerity measures aimed at getting the country
out of a government debt crisis. The action is expected to ground
flights, reduce medical service and close schools and government
offices, while some private sector unions will also stay off work.
Transport labor unions in the Czech Republic were meeting Tuesday to
decide whether to go on strike to protest taxation of their workers'
benefits. The unions want parliament to change a new law on value added
tax that took effect this year.
Greek PM rules out bailout but urges EU
solidarity
YAHOO
By PAN PYLAS and ELENA BECATOROS, Associated Press Writer
Feb. 19, 2010
LONDON – Greek Prime Minister George Papandreou told other European
leaders Friday that Greece intended to solve its debt crisis on its
own, as the government replaced the head of its debt management agency
ahead of key moves to refinance its massive deficit.
The news that Petros Christodoulou, former head of asset management at
the National Bank of Greece, will take over from Spyros Papanicolaou
comes as financial markets continue to fret about the Greek
government's ability to pay off its debt. Those worries have undermined
confidence in the 16-country euro currency.
The Finance Ministry did not give a reason for the appointment in its
announcement late Thursday.
Greece has taken a hammering in markets in recent months, after the new
government sharply revised the budget deficit shortly after the
elections to 12.7 percent of gross domestic product from a 3.7 percent
forecast months earlier — sending Europe into a new phase of the
financial crisis over mounting debts by Greece and several other
euro-zone countries.
Spreads of Greek government bonds over the equivalent German benchmark
bonds — a key indicator of the market's perception of a risk of default
— have spiraled in recent weeks, and stood at 326 basis points on
Friday afternoon. Papandreou reiterated in London that Greece's
troubles were "our responsibility" and that Greece was not seeking a
bailout. But he said Athens' woes affected all and that the country
needed the support of its partners in the EU.
"Higher interest rates for us means higher interest rates for
Europe....What we are simply saying is we'd like to borrow on the same
terms as other countries in the European Union and the eurozone,"
Papandreou said at a conference of socialist leaders.
The Prime Minister would not be drawn onto whether Greece was preparing
a multibillion euro bond issue next week as around euro20 billion of
its debt needs to be refinanced in April and May. There is mounting
speculation in the markets that Greece will begin looking to tap
investors before the end of February to take advantage of improved
market conditions — last month the spread over German bonds stood at
around 400 basis points.
Papandreou repeated his view that the country was not looking for a
bailout from its partners in the 16-country eurozone but "simply saying
we have a program and we need support for this program." Papandreou's
government has pledged to cut its budget deficit by four percentage
points in this year alone.
Papandreou also met with British Prime Minister Gordon Brown and
Spain's premier Jose Luis Rodriguez Zapatero, as well as Foreign
Secretary David Miliband — in addition to being Prime Minister,
Papandreou also holds the foreign affairs brief.
Zapatero, whose government is also facing pressure in the markets to
bring down its budget deficit, gave Papandreou support and said
deficits across Europe would come down once the recovery from recession
was firmly established.
"Of course we are going to reduce the deficits.....we are not going to
fall in the trap of the ideas of those who have created the financial
crisis," he said.
"The large majority (of Greeks) has no responsibility for what has
happened, and much less Papandreou's government..it deserves the trust
of European institutions, of the markets and he has the trust of all
the European governments," Zapatero added.
Back in Athens, Greek drivers lined up for gas at the few stations
still open Friday as a customs strike against government austerity
measures left many pumps running dry. The fuel shortage was the first
serious consequence of growing labor protests against the government's
emergency cuts, aimed at easing the debt crisis in Greece and shoring
up market confidence.
Customs workers have extended their strike against salary freezes and
bonus cuts through next Wednesday, when unions across Greece will hold
a general strike that is set to bring the country to a standstill.
Athens has come under intense pressure by its European Union partners
to bring its finances under control and explain the use of financial
deals known as currency swaps and how they affected the country's debt
and deficit figures.
Greece has announced a series of harsh austerity measures and says the
swaps debt deal, made with U.S. investment bank Goldman Sachs, was
above board and will be explained in a letter being sent by the finance
minister to the European Union.
The EU's top economy official, Olli Rehn, gave the Greek government
until Friday to supply answers on the use of the currency swaps.
"There will be a response. There is a letter by the Finance Minister,"
government spokesman Giorgos Petalotis said, adding it would "most
likely" be sent on Friday.
EU officials said however that the letter had not been received by
early Friday evening, and that once they received the letter, time
would be needed to analyze its contents.
Earlier this week, European finance ministers warned Athens it would
have to impose even tougher budget cuts if its current austerity
program can't reduce the deficit to 8.7 percent this year. Athens has
until March 16 to report back to the EU on its progress.
European Commission spokeswoman Amelia Torres said Rehn will visit
Greece "before the middle of March." She did not elaborate, but the
timing of the visit seemed designed to step up the pressure on Athens.
Bomb explodes outside a JP Morgan office

Last Updated: 3:04 PM, February 16, 2010
Posted: 1:48 PM, February 16, 2010
A bomb detonated Tuesday outside JP Morgan Chase & Co.’s offices in
Athens, Reuters reported, citing a police source.
No injuries were reported.
It was a time-bomb at JP Morgan's offices in central Athens," a police
official told Reuters. "The explosion damaged the outside door and
smashed some windows."
A local newspaper reportedly received a warning call prior to the
explosion, according to Reuters.
Greece's economic problems have roiled markets across the world in
recent weeks, as concerns about its fiscal crisis casts doubt on the
strength of the euro.
Greece faces deadline on swaps
YAHOO
By AOIFE WHITE, AP Business Writer
Feb. 16, 2010
BRUSSELS – Greece has only days to explain its use of complex financial
deals that it used to mask debt and just a month to prove that its
drastic budget cuts go far enough to reassure markets — and other EU
governments reluctant to bail Athens out if it can't pay its bills.
The Greek crisis has plunged the 16 nations that use the euro into a
crisis by breaking rules on debt and deficit that underpin Europe's
currency union amid worries that its problems could be even bigger
because its public finance figures cannot be trusted.
The EU's top economy official, Olli Rehn, said Tuesday that he wanted
the Greek government to supply answers by Friday on how it used
currency swaps and how that affected debt and deficit figures.
European Union finance ministers on Tuesday also gave Greece a deadline
of March 16 to show that it can make big spending cuts to bring its
deficit down from the EU's highest, 12.7 percent, to 8.7 percent this
year.
They said in a statement that this was essential to "remove the risk of
jeopardizing the proper functioning of economic and monetary union."
Eurozone nations — who have pledged to provide a financial bailout to
Greece if needed — said they would demand new spending cuts, higher
value-added taxes and fuel taxes and new taxes on luxury goods,
including cars, if Greece can't make the deficit reductions it is
promising.
Greece now has a month to show that it can make real savings from a
freeze on public sector salaries, cuts to bonuses and stipends and
promises to reform pensions and health care.
The government is facing opposition at home. Greek customs officials
walked off the job Tuesday for a three-day strike which will hamper
imports and exports.
But Greek Finance Minister George Papaconstantinou insisted that he is
already ahead of schedule on swinging budget reductions and that public
finances reported a slight surplus last month thanks to a one-off tax
on large companies.
"It's a matter of credibility for the country," he told reporters. "The
execution of the Greek budget for the month of January, based on
preliminary figures, is going quite well. We have actually a surplus."
Greece says it isn't asking for financial help and won't need any — but
it is facing a credibility crisis as a Feb. 1 report commissioned by
the Greek finance ministry warns of "significant debt revisions" for
2009 statistics due to swaps, debt to suppliers and state-guaranteed
loans that may default.
The report said some swaps are now "being done in order to transfer
interest from the current year to the future, with long-term loss to
the Greek state."
Rehn said "it is clear that a profound investigation must be done on
this matter," promising that he would check to see if all rules were
respected.
"If it turns out that there is such kind of securitization of swaps
that are not in line with the rules of the time, then of course we
would need to take action," he said.
The EU can take Greece to court, under threat of daily fines, to change
its statistics methods. It is already threatening legal action for
Greece's failure to report accurate public finance figures last year.
Papaconstantinou said Monday that such swaps were legal when Greece
used them and that it is not using them now and will stick to EU
statistics rules on new financing deals.
Papaconstantinou also said Greece was not alone among EU nations in
using such deals. Rehn said he was not aware of similar problems with
other countries but that "this has still to be verified."
Rehn also took a shot at the investment banks that advised Greece to
mask debt. Reports in The New York Times and Germany's Der Spiegel said
that Greece used U.S. financial institution Goldman Sachs to engage in
the swaps. The bank did not comment when contacted last week.
"I think the banks themselves should also ask, not least after the
financial crisis, if this has been in line with the code of ethics," he
said.
Traders' fears that Greece might not make debt repayments increased
Tuesday, with the spread of the Greek government bond widening to 3.35
percentage points against the benchmark German bond. The spread was
below 3.00 points last week on hope of a detailed eurozone bailout
plan.
EU Asks Greece to Explain Derivatives
Reports
NYTIMES
By REUTERS
Filed at 10:02 a.m. ET
February
15, 2010
BRUSSELS (Reuters) - The European Union has asked Greece to explain
reports that it engaged in derivatives trades with U.S. investment
banks that may have allowed it to mask the size of its debt and deficit
from EU authorities.
According to the New York Times, one contract in 2001 -- carried out
just as Greece was joining Europe's monetary union -- involved Greece
selling forward future lottery receipts and airport landing fees in
exchange for cash to write down debts.
The deal was treated as a currency trade rather than a loan, according
to the newspaper, allowing Greece to hide it from public view while
meeting EU deficit limits.
Greece's finance minister, George Papaconstantinou, on Monday dismissed
suggestions that his country may have played fast and loose with
monetary rules, saying the transactions Greece took part in were
permissible at the time.
"The kind of derivatives contracts reported by some newspapers were
legal at that time," he told reporters in Brussels. "Greece was not the
only country to use them... They were made illegal, (and) we have not
used them since then."
The issue has become a focus of attention as Greece has now
acknowledged that it has a budget deficit of nearly 13 percent of gross
domestic product -- more than four times EU limits -- and a national
debt equivalent to 120 percent of GDP.
The fiscal problems have led to pressure on Greek debt in bond markets
and weakened the European single currency.
The European Commission, the EU's executive that is responsible for
enforcing EU laws, said it had asked Greece to explain what contracts
it had engaged in as Eurostat, the EU's statistics agency, had never
been informed.
"I want to state that Eurostat was not aware of such transactions,"
Commission spokesman Amadeu Altafaj told a regular briefing on Monday.
"But I can tell you that Eurostat has indeed, following these reports,
already requested the Greek authorities for an explanation by the end
of February."
Asked if the derivatives trades that Greece is alleged to have
conducted fell within EU budget rules, Altafaj said:
"We need the information on what kind of transactions took place, if
they did (take place), and what was the effect on the government
accounts of Greece... This is something that we don't have the
information (on) yet and we have requested."
TRANSPARENCY
A senior Greek finance ministry official told Reuters that Greece's
current debt financing operations were transparent and complied with
Eurostat rules.
But Eurostat, which already has profound concerns about the reliability
of Greek macroeconomic data, is likely to take a very hard look at
exactly what transactions took place and when.
"This is why we are requesting more capacity for Eurostat to indeed to
have more thorough and deeper view on these statistics. Reliable
statistics are a key issue in management of public finances,"
Commission spokesman Altafaj said.
What Greece appears to have carried out, at least on one occasion, is a
currency swap, which Altafaj said would have to be examined to see if
it met EU rules.
"If this is legitimate in government management operations, which is
one of the issues that is at stake, yes it is, it is legitimate, if,
and I understand if, the underlying exchange rates and or interest
rates of such swaps are calculated from the observed market rate, and
this is something that we will have to assess based on the information
we receive," he said.
At a meeting later on Monday, euro zone finance ministers are expected
to exert more pressure on Greece to implement planned budget deficit
cuts. EU leaders pledged last week to help Athens resolve its crisis if
needed, but they are still hoping to avoid having to provide concrete
aid.
Wall St. Helped Greece to Mask Debt Fueling
Europe’s Crisis
NYTIMES
By LOUISE STORY, LANDON THOMAS Jr. and NELSON D. SCHWARTZ
February
14, 2010
Wall Street tactics akin to the ones that fostered subprime mortgages
in America have worsened the financial crisis shaking Greece and
undermining the euro by enabling European governments to hide their
mounting debts. As worries over Greece rattle world markets,
records and interviews show that with Wall Street’s help, the nation
engaged in a decade-long effort to skirt European debt limits. One deal
created by Goldman Sachs helped obscure billions in debt from the
budget overseers in Brussels.
Even as the crisis was nearing the flashpoint, banks were searching for
ways to help Greece forestall the day of reckoning. In early November —
three months before Athens became the epicenter of global financial
anxiety — a team from Goldman Sachs arrived in the ancient city with a
very modern proposition for a government struggling to pay its bills,
according to two people who were briefed on the meeting.
The bankers, led by Goldman’s president, Gary D. Cohn, held out a
financing instrument that would have pushed debt from Greece’s health
care system far into the future, much as when strapped homeowners take
out second mortgages to pay off their credit cards. It had worked
before. In 2001, just after Greece was admitted to Europe’s monetary
union, Goldman helped the government quietly borrow billions, people
familiar with the transaction said. That deal, hidden from public view
because it was treated as a currency trade rather than a loan, helped
Athens to meet Europe’s deficit rules while continuing to spend beyond
its means.
Athens did not pursue the latest Goldman proposal, but with Greece
groaning under the weight of its debts and with its richer neighbors
vowing to come to its aid, the deals over the last decade are raising
questions about Wall Street’s role in the world’s latest financial
drama.
As in the American subprime crisis and the implosion of the American
International Group, financial derivatives played a role in the run-up
of Greek debt. Instruments developed by Goldman Sachs, JPMorgan Chase
and a wide range of other banks enabled politicians to mask additional
borrowing in Greece, Italy and possibly elsewhere. In dozens of
deals across the Continent, banks provided cash upfront in return for
government payments in the future, with those liabilities then left off
the books. Greece, for example, traded away the rights to airport fees
and lottery proceeds in years to come.
Critics say that such deals, because they are not recorded as loans,
mislead investors and regulators about the depth of a country’s
liabilities. Some of the Greek deals were named after figures in
Greek mythology. One of them, for instance, was called Aeolos, after
the god of the winds.
The crisis in Greece poses the most significant challenge yet to
Europe’s common currency, the euro, and the Continent’s goal of
economic unity. The country is, in the argot of banking, too big to be
allowed to fail. Greece owes the world $300 billion, and major banks
are on the hook for much of that debt. A default would reverberate
around the globe. A spokeswoman for the Greek finance ministry
said the government had met with many banks in recent months and had
not committed to any bank’s offers. All debt financings “are conducted
in an effort of transparency,” she said. Goldman and JPMorgan declined
to comment.
While Wall Street’s handiwork in Europe has received little attention
on this side of the Atlantic, it has been sharply criticized in Greece
and in magazines like Der Spiegel in Germany.
“Politicians want to pass the ball forward, and if a banker can show
them a way to pass a problem to the future, they will fall for it,”
said Gikas A. Hardouvelis, an economist and former government official
who helped write a recent report on Greece’s accounting policies.
Wall Street did not create Europe’s debt problem. But bankers enabled
Greece and others to borrow beyond their means, in deals that were
perfectly legal. Few rules govern how nations can borrow the money they
need for expenses like the military and health care. The market for
sovereign debt — the Wall Street term for loans to governments — is as
unfettered as it is vast.
“If a government wants to cheat, it can cheat,” said Garry Schinasi, a
veteran of the International Monetary Fund’s capital markets
surveillance unit, which monitors vulnerability in global capital
markets.
Banks eagerly exploited what was, for them, a highly lucrative
symbiosis with free-spending governments. While Greece did not take
advantage of Goldman’s proposal in November 2009, it had paid the bank
about $300 million in fees for arranging the 2001 transaction,
according to several bankers familiar with the deal. Such
derivatives, which are not openly documented or disclosed, add to the
uncertainty over how deep the troubles go in Greece and which other
governments might have used similar off-balance sheet accounting.
The tide of fear is now washing over other economically troubled
countries on the periphery of Europe, making it more expensive for
Italy, Spain and Portugal to borrow.
For all the benefits of uniting Europe with one currency, the birth of
the euro came with an original sin: countries like Italy and Greece
entered the monetary union with bigger deficits than the ones permitted
under the treaty that created the currency. Rather than raise taxes or
reduce spending, however, these governments artificially reduced their
deficits with derivatives.
Derivatives do not have to be sinister. The 2001 transaction involved a
type of derivative known as a swap. One such instrument, called an
interest-rate swap, can help companies and countries cope with swings
in their borrowing costs by exchanging fixed-rate payments for
floating-rate ones, or vice versa. Another kind, a currency swap, can
minimize the impact of volatile foreign exchange rates.
But with the help of JPMorgan, Italy was able to do more than that.
Despite persistently high deficits, a 1996 derivative helped bring
Italy’s budget into line by swapping currency with JPMorgan at a
favorable exchange rate, effectively putting more money in the
government’s hands. In return, Italy committed to future payments that
were not booked as liabilities.
“Derivatives are a very useful instrument,” said Gustavo Piga, an
economics professor who wrote a report for the Council on Foreign
Relations on the Italian transaction. “They just become bad if they’re
used to window-dress accounts.”
In Greece, the financial wizardry went even further. In what amounted
to a garage sale on a national scale, Greek officials essentially
mortgaged the country’s airports and highways to raise much-needed
money.
Aeolos, a legal entity created in 2001, helped Greece reduce the debt
on its balance sheet that year. As part of the deal, Greece got cash
upfront in return for pledging future landing fees at the country’s
airports. A similar deal in 2000 called Ariadne devoured the revenue
that the government collected from its national lottery. Greece,
however, classified those transactions as sales, not loans, despite
doubts by many critics.
These kinds of deals have been controversial within government circles
for years. As far back as 2000, European finance ministers fiercely
debated whether derivative deals used for creative accounting should be
disclosed. The answer was no. But in 2002, accounting disclosure
was required for many entities like Aeolos and Ariadne that did not
appear on nations’ balance sheets, prompting governments to restate
such deals as loans rather than sales.
Still, as recently as 2008, Eurostat, the European Union’s statistics
agency, reported that “in a number of instances, the observed
securitization operations seem to have been purportedly designed to
achieve a given accounting result, irrespective of the economic merit
of the operation.”
While such accounting gimmicks may be beneficial in the short run, over
time they can prove disastrous.
George Alogoskoufis, who became Greece’s finance minister in a
political party shift after the Goldman deal, criticized the
transaction in the Parliament in 2005. The deal, Mr. Alogoskoufis
argued, would saddle the government with big payments to Goldman until
2019. Mr. Alogoskoufis, who stepped down a year ago, said in an
e-mail message last week that Goldman later agreed to reconfigure the
deal “to restore its good will with the republic.” He said the new
design was better for Greece than the old one.
In 2005, Goldman sold the interest rate swap to the National Bank of
Greece, the country’s largest bank, according to two people briefed on
the transaction.
In 2008, Goldman helped the bank put the swap into a legal entity
called Titlos. But the bank retained the bonds that Titlos issued,
according to Dealogic, a financial research firm, for use as collateral
to borrow even more from the European Central Bank.
Edward Manchester, a senior vice president at the Moody’s credit rating
agency, said the deal would ultimately be a money-loser for Greece
because of its long-term payment obligations.
Referring to the Titlos swap with the government of Greece, he said:
“This swap is always going to be unprofitable for the Greek government.”
SEC looks at changes for 'dark pools'
YAHOO
By MARCY GORDON, AP Business Writer
October 21, 2009
WASHINGTON – Federal regulators
considered tighter oversight Wednesday for so-called "dark pools,"
trading systems that don't publicly provide price quotes and compete
with major stock exchanges.
The Securities and Exchange
Commission was expected to propose new rules that would require more
stock quotes in the "dark pool" systems to be publicly displayed.
The alternative trading systems,
private networks matching buyers and sellers of large blocks of stocks,
have grown explosively in recent years and now account for an estimated
7.2 percent of all share volume. SEC officials have identified them as
a potential emerging risk to markets and investors.
The SEC initiative is the latest
action by the agency seeking to bring tighter oversight to the markets
amid questions about transparency and fairness on Wall Street. The SEC
has floated a proposal restricting short-selling — or betting against a
stock — in down markets.
Last month, the agency proposed
banning "flash orders," which give traders a split-second edge in
buying or selling stocks. A flash order refers to certain members of
exchanges — often large institutions — buying and selling information
about ongoing stock trades milliseconds before that information is made
public.
Institutional investors like pension
funds may use dark pools to sell big blocks of stock away from the
public scrutiny of an exchange like the New York Stock Exchange or
Nasdaq Stock Market that could drive the share price lower.
"Given the growth of dark pools,
this lack of transparency could create a two-tiered market that
deprives the public of information about stock prices," SEC Chairman
Mary Schapiro said at the agency's public meeting Wednesday.
When investors place an order to buy
or sell a stock on an exchange, the order is normally displayed for the
public to view. With some dark pools, investors can signal their
interest in buying or selling a stock but that indication of interest
is communicated only to a group of market participants.
That means investors who operate
within the dark pool have access to information about potential trades
which other investors using public quotes do not, the SEC says.
The SEC proposal would require
indications of interest to be treated like other stock quotes and
subject to the same disclosure rules.
A 1999 SEC rule established a
separate set of regulations for alternative trading systems, which have
grown to 29 from 10 in 2002. Examples include: London-based Turquoise
Trading Ltd., a European system established by Citigroup Inc., Goldman
Sachs Group Inc., France's Societe Generale SA and other major banks;
Toronto-based Alpha was set up by several major Canadian banks; and
Liquidnet Inc. in New York.
NYSE chief executive Duncan
Niederauer has asked the SEC to subject the alternative systems to a
stricter set of regulations that is closer to the regime for the major
exchanges. His proposed changes would go further than those being
considered by the SEC.
"We are not against dark pools,"
Niederauer said Tuesday in a conference call with reporters. "We're in
favor of competition; we'd just like it to be a level playing field."
Sen. Charles Schumer, D-N.Y., sent a
letter to Schapiro asking the SEC commissioners to consider stricter
regulations for the trading systems as well as establishment of a
consolidated surveillance system for all markets, for which the
alternative systems would contribute some of the cost.
NYSE
chief
urges changes for 'dark pools'
YAHOO
By MARCY GORDON, AP Business Writer
October 20, 2009
WASHINGTON – With federal regulators poised to propose changes for
so-called "dark pools," the head of the New York Stock Exchange said
tighter rules should be applied to the alternative trading systems that
don't publicly provide price quotes and compete with traditional
exchanges.
The Securities and Exchange Commission is expected to propose new rules
on Wednesday that would require fuller display of information on
trades, bids and offers for the "dark pool" systems.
NYSE CEO Duncan Niederauer and Sen. Charles Schumer, D-N.Y., have asked
the SEC to subject the alternative systems to a stricter set of
regulations that's closer to the regime for the major exchanges. Their
proposed changes would go further than those being considered by the
SEC.
"We are not against dark pools," Niederauer said Tuesday in a
conference call with reporters. "We're in favor of competition; we'd
just like it to be a level playing field."
The SEC initiative is the latest action by the agency seeking to bring
tighter oversight to the markets amid questions about transparency and
fairness on Wall Street. The SEC has floated a proposal restricting
short-selling — or betting against a stock — in down markets.
Last month, the agency proposed banning "flash orders," which give
traders a split-second edge in buying or selling stocks. A flash order
refers to certain members of exchanges — often large institutions —
buying and selling information about ongoing stock trades milliseconds
before that information is made public.
The alternative trading systems have grown explosively, accounting for
an estimated 7.2 percent of all share volume. SEC Chairman Mary
Schapiro has identified them as a potential emerging risk to markets
and investors, and asked agency staff earlier this year to examine ways
of bringing greater transparency to them.
The systems are private networks matching buyers and sellers of large
blocks of stocks. Institutional investors like pension funds may use
them to sell big blocks of stock away from the public scrutiny of an
exchange like the NYSE or Nasdaq Stock Market that could drive the
share price lower.
"This lack of transparency has the potential to undermine public
confidence in the equity markets, particularly if the volume of trading
activity in dark pools increases substantially," Schapiro said in a
speech in June. "For example, the lack of reliable information can
prompt speculation and suspicion about the basis for market
fluctuations."
Schumer sent a letter to Schapiro asking the SEC commissioners to
consider stricter regulations for the trading systems as well as
establishment of a consolidated surveillance system for all markets,
for which the alternative systems would contribute some of the cost.
SEC approval would be required to set up a new alternative system or
make changes in operations of an existing one.
"I respectfully ask that you consider the proposals ... to ensure that
(alternative trading systems), while continuing to provide beneficial
competition to registered exchanges that directly and indirectly
benefits retail investors, do not undermine the fairness, transparency
and integrity in our markets," Schumer wrote.
A 1999 SEC rule set up a separate set of regulations for alternative
trading systems, which have grown to around 30 from 10 in 2002. A
prominent ATS is Turquoise, a European system established by Citigroup
Inc., Goldman Sachs Group Inc., France's Societe Generale SA and other
major banks. The NYSE's Arca Europe also is an ATS.
Schumer
jumps into dark pool debate ahead of SEC meet
YAHOO
By Jonathan Spicer
October 20, 2009
NEW YORK (Reuters) – U.S. Senator Charles Schumer on Tuesday
jumped in to the debate over anonymous trading venues known as dark
pools, calling for tough new regulations a day before the U.S.
Securities and Exchange Commission meets to consider new rules.
Schumer, among the most vocal of lawmakers pressing for market
structure reform, urged in a letter to SEC Chairman Mary Schapiro that
the regulator adopt some of the most robust measures now on the table,
and called for a new market-wide monitor.
He said the growth of dark pools, which now number more than 40, risks
undermining fair and transparent markets, and that regulation has not
kept pace. The private venues are used primarily to trade large blocks
of stock, and have proliferated this decade as the marketplace went
electronic.
"We want to keep them in existence ... but we want a much more level
playing field, which is what we don't have right now," Schumer said on
a media conference call, adding the fragmented market "compromises the
ability of regulators to monitor and enforce such abuses as front
running and market manipulation..."
Dark pools, the largest of which are run by banks such as Goldman Sachs
(GS.N) and Credit Suisse (CSGN.VX), account for an estimated 10 to 15
percent of overall U.S. equity volume.
The SEC meets Wednesday to consider proposals for changes that are
expected to shed more light on the venues, including requiring them to
display more quotes and publicly reveal more data on volumes.
The industry also expects more clarity on whether actionable
indications of interest, or IOIs, which dark pools and exchanges use to
communicate, should be treated as quotes.
Schumer said all actionable IOIs should be treated as quotes, which
would effectively kill them, and that the threshold beyond which dark
pools must display quotes should be dropped from 5 percent to 1 percent.
He also called on the SEC to consider real-time reporting of dark pool
trades to the consolidated tape -- a measure that many expect, but that
some warn could hamper institutions' ability to execute big,
complicated orders.
Schumer made a splash this summer when he called for the elimination of
so-called flash orders, which some exchanges sent to specific market
players before routing them to the wider market. The SEC last month
proposed to ban flashes.
ANTICIPATING NEW RULES
NYSE Euronext (NYX.N), which runs the New York Stock Exchange and
participated in Schumer's conference call, on Tuesday said it would
begin next month offering a means by which dark pools and
broker-dealers could report trading.
The service -- which effectively dusts off a so-called trade-reporting
facility, or TRF, that has been mostly dormant for a year -- is backed
by units of Goldman, Barclays PLC (BARC.L), UBS AG (UBSN.VX), Knight
Capital (NITE.O), and by Getco, the big high-frequency market-maker.
All U.S. off-exchange trading is now printed on Nasdaq OMX's (NDAQ.O)
TRF, which accounts for some 35 percent of overall volume. NYSE's rival
TRF would standardize volume reporting, print it daily on its website
-- and represents a way for the exchange to facilitate any new SEC
rules.
Schumer said dark pools should face more robust start-up regulations,
and should share the costs of providing market-wide surveillance -- an
argument long held by NYSE Euronext CEO Duncan Niederauer, who was also
on the call.
Schumer did not identify which body should act as monitor.
U.S. market surveillance is now shared by in-house teams at the trading
venues, as well as the Financial Industry Regulatory Authority (FINRA).
The SEC is the umbrella regulator and police for stock and options
markets.
Key House Panel Votes to Regulate
Derivatives
NYTIMES
By STEPHEN LABATON
October
16, 2009
WASHINGTON — A key House committee
voted on Thursday to regulate, for the first time, trading in the
arcane financial instruments known as derivatives, which have been
linked to the financial crisis that shocked Wall Street and cut into
the savings of millions of Americans.
The 43-to-26 vote by the Financial
Services Committee was mostly along party lines and was a big step in
President Obama’s proposed overhaul of rules covering the nation’s
financial system.
The measure is part of a bill that
will be debated by the House and Senate. Michael S. Barr, the assistant
Treasury secretary for financial institutions, called the bill
“absolutely essential to preserving a strong marketplace.”
One common derivative is the credit
default swap, which has been cited repeatedly in the various
examinations of the near-collapse of the financial system.
The day-to-day progress of the
regulatory bill is being followed by a large cadre of people who hope
to influence its contents as it makes it way toward final passage.
Representatives from a surfeit of industries have descended on the
Financial Services Committee.
The financial services industry
alone has poured more than $220 million into lobbying in 2009, much of
it in anticipation of this Congressional effort now beginning. As usual
for major financial services legislation, lawmakers have heard an
earful from small community banks and large Wall Street banks, as well
as from insurance companies, credit card companies, credit unions,
mutual funds and hedge funds.
But since virtually every imaginable
company could be touched by the comprehensive legislation proposed by
the Obama administration, the surprisingly broad array of lobbyists
trooping to Capitol Hill also includes advocates for airlines,
pawnbrokers, real estate developers, farmers, car dealers,
manufacturers, retailers and energy and telephone companies. They want
to make sure any new oversight of the financial system does not lead to
tighter regulations of their businesses or make it more expensive for
them to finance their operations or hedge their risks.
Other groups are lobbying over
whether the rules should be changed to make it easier to sue
corporations and their advisers and whether restrictions should be
eased to enable shareholders to have a greater say in the election of
directors and the pay of senior executives.
“The legislation proposes to
regulate significant aspects of the economy, and any time you have that
kind of legislation, it is bound to draw to Congress the interests of
many — lawyers, labor unions, consumer groups and many companies,” said
Steven A. Elmendorf, a former senior aide to the House Democratic
leadership who represents several major financial institutions and
groups.
Mr. Elmendorf suggested that the
legislation could keep the lobbyists busy for many weeks since it is
the subject of deliberations by at least four committees in the House
and Senate, along with floor action in both chambers and then more
meetings to reconcile competing bills.
“There will be a lot of
opportunities and ways the bill can change,” he said. “This will be a
long process.”
Gazing across a hearing room jammed
with lobbyists and lawyers, Representative Barney Frank, Democrat of
Massachusetts and the chairman of the House Financial Services
Committee, made an observation on Wednesday about a proposed amendment
that some lobbyists interpreted as a comment about the keen interest of
their clients.
“Watching
sausage being made and watching legislation being made isn’t always
attractive,” Mr. Frank said.
Even though President Obama vowed to
change the culture of corporate influence on Washington, the
administration has contributed, albeit inadvertently, to making this a
banner year for lobbyists. As the White House has awakened the alphabet
soup of federal agencies from their deregulatory slumber of the
previous eight years, lobbying shops have emerged to fight for their
clients’ newfound interests.
In the case of financial overhaul
legislation, the corporate interests have particular sway with moderate
and conservative Democrats, whose votes are essential for the
legislation to progress through Congress. So far the lobbyists have
been moderately successful in influencing the contours of the
legislation, judging by the ever-growing list of exemptions from
tougher oversight of derivatives and from supervision by the proposed
consumer financial protection agency.
The House Financial Services
Committee, for instance, approved a provision on Wednesday that Mr.
Frank said would exempt “the great majority” of businesses that use
derivative instruments to hedge their business risks from trading such
instruments through exchanges or clearinghouses. Senior officials at
the Commodity Futures Trading Commission and the Securities and
Exchange Commission have been critical of the exemptions, saying they
would create too large a loophole for financial instruments that were
unregulated and played a central role in the economic crisis.
On Wednesday, the administration
announced its support for the exemptions. Mr. Barr, the assistant
Treasury secretary, said in a telephone briefing with reporters that,
while the administration did not propose the exemptions, they were
“reasonable ones” that would still permit aggressive oversight because
the legislation would impose supervision on the dealers of derivatives
instruments.
The new consumer protection agency
has become a particular magnet for lobbying efforts. Bankers have waged
a multimillion-dollar campaign to kill the agency or at least to
substantially weaken the powers the administration would like it to
have. The United States Chamber of Commerce, which claims a membership
of more than three million businesses, is conducting a $2 million
advertising campaign against the agency. The campaign has gained enough
political traction to prompt President Obama to publicly chastise it as
misleading.
The chamber joined 17 other trade
associations, including the Financial Services Roundtable and the
Business Roundtable, in a letter sent this week to House members
opposing the agency.
The administration has proposed that
the new agency protect consumers from abusive or deceptive credit
cards, mortgages and other loans. But responding to the concerns that
the agency could try to exert its jurisdiction over an array of other
industries that lend money, like retailers and car dealers, Mr. Frank
has made clear his intention to exempt many other businesses from
oversight as part of his effort to steer the measure through Congress.
The political obstacles to the
creation of a consumer protection agency are formidable. In the last
decade, banking and other interests that now oppose the agency’s
creation contributed more than $77 million to the members of the House
Financial Services Committee, according to the Center for Responsive
Politics, a nonpartisan research organization that studies the
influence of money on policy.
Two of the largest recipients of
money from the financial sector over the period have been Mr. Frank,
whose campaigns have received more than $3 million, and Representative
Spencer Bachus of Alabama, the senior Republican on the committee and a
leading critic of the administration’s plan.
SEC, CFTC
Could Ban ‘Abusive Swaps’
Under Frank Bill
YAHOO
Dawn Kopecki
Fri Oct 2, 6:54 pm ET
Oct. 2 (Bloomberg) -- House Financial Services Committee Chairman
Barney Frank would give regulators authority to ban “abusive swaps”
under legislation to revamp oversight of the over-the-counter
derivatives market
The Securities and Exchange Commission and Commodity Futures Trading
Commission would be authorized to “prohibit transactions in any swap”
that regulators determine “would be detrimental to the stability of a
financial market or of participants in a financial market,” according
to a 187-page draft measure released today by Frank.
Opaque financial products, including some derivatives, have contributed
to almost $1.6 trillion in writedowns and losses at the world’s biggest
banks, brokers and insurers since the start of 2007, according to data
compiled by Bloomberg. Among the fallen companies are Lehman Brothers
Holdings Inc., the investment bank that filed for bankruptcy, and
insurer American International Group Inc., which has been surviving on
government loans.
Frank’s legislation would require the most common and actively traded
over-the-counter derivatives contracts to be bought and sold on
exchanges or processed through a regulated trading platform.
‘Major’ Factor
“Lacking and lagging regulation of OTC derivatives was a major
contributing factor to last year’s crisis, including the highly
leveraged credit default swaps at AIG that prompted government
intervention,” Representative Melissa Bean, an Illinois Democrat who
serves on Frank’s committee, said in an e- mailed statement.
The legislation also would give the Treasury Department the final say
if the SEC and CFTC couldn’t agree on joint regulations, including
setting position limits or the treatment of products that are
economically similar, such as stock options and stock futures. A
three-page proposal released by Frank in July would have given that
power to a new Financial Services Oversight Council.
Derivatives are contracts used to hedge against changes in stocks,
bonds, currencies, commodities, interest rates and weather.
Credit-default swaps are derivatives that were created primarily to
protect lenders and bondholders from company defaults. Some lawmakers
and regulators have said they may have been used to spread false rumors
about financial companies to drive down stock prices.
U.S. Job Seekers Exceed Openings by Record Ratio
NYTIMES
By PETER S. GOODMAN
September 27, 2009
Despite signs that the economy has
resumed growing, unemployed Americans now confront a job market that is
bleaker than ever in the current recession, and employment prospects
are still getting worse.
Job seekers now outnumber openings
six to one, the worst ratio since the government began tracking open
positions in 2000. According to the Labor Department’s latest numbers,
from July, only 2.4 million full-time permanent jobs were open, with
14.5 million people officially unemployed.
And even though the pace of layoffs
is slowing, many companies remain anxious about growth prospects in the
months ahead, making them reluctant to add to their payrolls.
“There’s too much uncertainty out
there,” said Thomas A. Kochan, a labor economist at M.I.T.’s Sloan
School of Management. “There’s not going to be an upsurge in job
openings for quite a while, not until employers feel confident the
economy is really growing.”
The dearth of jobs reflects the
caution of many American businesses when no one knows what will emerge
to propel the economy. With unemployment at 9.7 percent nationwide, the
shortage of paychecks is both a cause and an effect of weak hiring.
In Milwaukee, Debbie Kransky has
been without work since February, when she was laid off from a medical
billing position — her second job loss in two years. She has exhausted
her unemployment benefits, because her last job lasted for only a month.
Indeed, in a perverse quirk of the
unemployment system, she would have qualified for continued benefits
had she stayed jobless the whole two years, rather than taking a new
position this year. But since her latest unemployment claim stemmed
from a job that lasted mere weeks, she recently drew her final check of
$340.
Ms. Kransky, 51, has run through her
life savings of roughly $10,000. Her job search has garnered little
besides anxiety.
“I’ve worked my entire life,” said
Ms. Kransky, who lives alone in a one-bedroom apartment. “I’ve got
October rent. After that, I don’t know. I’ve never lived month to month
my entire life. I’m just so scared, I can’t even put it into words.”
Last week, Ms. Kransky was invited
to an interview for a clerical job with a health insurance company. She
drove her Jeep truck downtown and waited in the lobby of an office
building for nearly an hour, but no one showed. Despondent, she drove
home, down $10 in gasoline.
For years, the economy has been
powered by consumers, who borrowed exuberantly against real estate and
tapped burgeoning stock portfolios to spend in excess of their incomes.
Those sources of easy money have mostly dried up. Consumption is now
tempered by saving; optimism has been eclipsed by worry.
Meanwhile, some businesses are in a
holding pattern as they await the financial consequences of the health
care reforms being debated in Washington.
Even after companies regain an
inclination to expand, they will probably not hire aggressively anytime
soon. Experts say that so many businesses have pared back working hours
for people on their payrolls, while eliminating temporary workers, that
many can increase output simply by increasing the workload on existing
employees.
“They have tons of room to increase
work without hiring a single person,” said Heidi Shierholz, an
economist at the Economic Policy Institute Economist. “For people who
are out of work, we do not see signs of light at the end of the tunnel.”
Even typically hard-charging
companies are showing caution. During
the technology bubble of the late 1990s and again this decade, Cisco
Systems — which makes Internet equipment — expanded rapidly. As the
sense takes hold that the recession has passed, Cisco is again
envisioning double-digit rates of sales growth, with plans to move
aggressively into new markets, like the business of operating large
scale computer data servers.
Yet even as Cisco pursues such
designs, the company’s chief executive, John T. Chambers, said in an
interview Friday that he anticipated “slow hiring,” given concerns
about the vigor of growth ahead. “We’ll be doing it selectively,” he
said.
Two recent surveys of newspaper
help-wanted advertisements and of employers’ inclinations to add
workers were at their lowest levels on record, noted Andrew Tilton, a
Goldman Sachs economist. Job
placement companies say their customers are not yet wiling to hire
large numbers of temporary workers, usually a precursor to hiring
full-timers.
“It’s going to take quite some time
before we see robust job growth,” said Tig Gilliam, chief executive of
Adecco North America, a major job placement and staffing company.
During the last recession, in 2001,
the number of jobless people reached little more than double the number
of full-time job openings, according to the Labor Department data. By
the beginning of this year, job seekers outnumbered jobs four-to-one,
with the ratio growing ever more lopsided in recent months.
Though layoffs have been both severe
and prominent, the greatest source of distress is a predilection
against hiring by many American businesses. From the beginning of the
recession in December 2007 through July of this year, job openings
declined 45 percent in the West and the South, 36 percent in the
Midwest and 23 percent in the Northeast.
Shrinking job opportunities have
assailed virtually every industry this year. Since the end of 2008, job
openings have diminished 47 percent in manufacturing, 37 percent in
construction and 22 percent in retail. Even in education and health
services — faster-growing areas in which many unemployed people have
trained for new careers — job openings have dropped 21 percent this
year. Despite the passage of a stimulus spending package aimed at
shoring up state and local coffers, government job openings have
diminished 17 percent this year.
In the suburbs of Chicago, Vicki
Redican, 52, has been unemployed for almost two years, since she lost
her $75,000-a-year job as a sales and marketing manager at a plastics
company. College-educated, Ms. Redican first sought another management
job. More recently, she has tried and failed to land a cashier’s
position at a local grocery store, and a barista slot at a Starbucks
coffee shop.
Substitute teaching assignments once
helped her pay the bills. “Now, there are so many people substitute
teaching that I can no longer get assignments,” she said.
“I’ve learned that I can’t look to
tomorrow,” she said. “Every day, I try to do the best I can. I say to
myself, ‘I don’t control this process.’ That’s the only way you can
look at it. Otherwise, you’d have to go up on the roof and crack your
head open.

INPUT-OUTPUT
ECONOMICS, we think, supports this analysis - government jobs have
little "multiplier" value
Does
Aid to States Stimulate the Economy, or Votes?
NYTIMES
By Casey B. Mulligan (an economics professor at the University
of Chicago)
August 26, 2009, 8:23 am
About one-third of the aid in the
“stimulus” law is aimed at state and local governments. This allocation
— largely intended to save the jobs of government employees, among
other goals like providing more services for struggling families —
vastly overstates the importance of state and local government in the
national employment picture, and thereby diminishes the law’s potency
as a stimulus to national employment.
If, as some of the experts say, it
were the task of federal fiscal policy to put people back to work, you
would think that stimulus spending would be allocated to the various
sectors in rough proportion to the jobs that were lost, or might be
lost.
Before this recession started, state
and local government employment was only 14 percent of national
employment and a lesser percentage of national payroll spending — far
less than the one-third of the importance it was given in the stimulus
law.
State and local governments are
seeing declines in their revenues from income, sales and other taxes.
Some of those governments have cut hours or the number of workdays for
their employees. But lots of industries are seeing their revenues
decline, and have reduced working hours, so these changes do not put
state and local governments in a special position.
Source: Casey B. Mulligan, analysis
of Bureau of Labor Statistics data
Although stimulus advocates insist
that saving state and local government is the secret to an effective
stimulus law, economists have known for a long time that state and
local government employment is more stable than private-sector
employment, even without special stimulus aid. The chart above shows
how, by the time the stimulus law was being debated this January, the
private sector had lost four million jobs during this recession,
whereas state and local government employment had grown by 124,000.
(Since then, state and local government has lost 14,000 jobs –- for a
cumulative gain of 110,000 jobs –- while the private sector lost
another 2.9 million.)
In the average month, over two
million private-sector employees were let go, as compared to 96,000
state and local government employees. Of course, that was bad news for
96,000 families of state and local government employees, but I see no
economic reason why their suffering would count 20 times as much as the
suffering resulting from the private-sector layoffs.
For these reasons, an effective
stimulus law would have allocated state and local government something
from 4 percent (its share of layoffs) to 14 percent (its share of
employment) of its funds.
Economic analysis does not support
the extraordinary importance afforded state and local governments by
the stimulus law, but political analysis might. In particular,
patronage jobs are an important part of the political participation
machine. Perhaps when members of Congress were talking about “saving
jobs” as they authored the stimulus law, they were talking about 535
specific jobs — their own!
G.I.G.O.?
U.S. adds clerks to clear clunkers;
Volunteers include FAA
By William Ehart
Originally published 04:45 a.m., August 22, 2009, updated 01:21 p.m.,
August 22, 2009
The U.S. Transportation Department, billions of dollars behind in
paying "cash-for-clunkers" rebates, has hired private contractors and
solicited volunteers from the Federal Aviation Administration and its
own executive ranks to work overtime to clear the backlog.
Employees of the FAA's air-traffic-control unit were asked to help, but
the Transportation Department stressed Friday that essential safety
personnel were not diverted from their duties.
A total of 1,200 workers, including about 300 contractors from
Citigroup, the financial services giant, are now working seven days a
week to review applications and reimburse auto dealers for rebates
advanced to customers, officials said.
The department tripled its program staff to 1,100 last week, and
recently added another 100 headquarters employees.
On Thursday, Transportation Secretary Ray LaHood said the program would
stop taking applications Monday at 8 p.m. to provide an "orderly
wind-down" and ease uncertainty about when funds would run out.
The National Automobile Dealers Association, which had endorsed the
move, urged the Obama administration late Friday to extend the deadline
because the program's Web site was crashing.
"Many dealers are working round-the-clock to submit their 'clunkers'
applications to meet the administration's deadline," the group said.
"Despite these efforts, computer issues may prevent some 'clunker'
applications from being submitted in time, through no fault of the
dealers."
From the start, the Car Allowance Rebate System, or CARS, proved too
popular for its $1 billion budget and the several hundred employees
assigned to the program.
Planners who expected to sell 250,000 cars in three months are now
deluged with nearly twice that many applications seeking more than $2
billion in rebates after less than one month. Only 7 percent of the
rebates have been paid, leaving many auto dealers out millions of
dollars. Dealers were supposed to be repaid within 10 days.
Auto manufacturers have agreed to provide financial assistance to
dealers until they are reimbursed.
Days after the program began, the Transportation Department had to seek
additional funding. So many deals were in the pipeline, officials
couldn't be sure when the original funding would be exhausted, and
dealers were concerned they would be left holding the bag.
Congress approved $2 billion in
additional funding on Aug. 7.
"We set up the program in 30 days,
which was what Congress gave us," said Jill Zuckman, assistant to Mr.
LaHood.
"No one anticipated that 250,000
cars would be sold in the first four days. It proved to be more than
the people we had available could handle."
Dealers exacerbated the problem by
making many thousands of deals before final program rules were posted
on July 24, she said.
"Federal employees are pitching in,
working nights and weekends to get this taken care of, but it's a
two-way street. The [auto] dealers have to submit accurate and complete
applications," she said.
John D. Porcari, deputy secretary of
transportation and the former top transit official in Maryland, was
training Friday to help process applications this weekend.
Mr. LaHood was out of town on
business and missed the training session, Ms. Zuckman said.
One reason the department decided to
wind down the program Monday is because it couldn't risk exceeding the
program's $3 billion budget while Congress was in recess, she said.
White House spokesman Robert Gibbs
told reporters Friday the administration would not seek additional
funding for CARS when Congress returns.
The extra program workers are
located mainly in Washington and at the Mike Monroney Aeronautical
Center in Oklahoma City, which houses air traffic controllers as well
as support personnel.
An FAA memo obtained by The
Washington Times reads in part:
"We have been asked to provide
volunteers to assist with this high-visibility program … employees may
work during regular business hours (providing mission allows) and/or
overtime.
"The [Air Traffic Organization] has
been asked to provide a list of 100 employees to assist. They will be
asked to attend a two-hour training course this afternoon. The task is
expected to take 5 to 10 days."
But Ms. Zuckman said that only
support personnel, such as in finance and operations, were asked to
work on the clunkers program.
"Nobody is being ordered to do
anything; we weren't asking air traffic controllers to leave their
posts. We're using budget and accounting people primarily," she said.
"It was made clear that no core
mission activities of the FAA are to be affected by this effort,
especially as they could relate to air traffic operations."
A union spokeswoman confirmed the
account Friday.
"Air traffic controllers are not
being asked to do this," said Alex Caldwell, a spokeswoman for the
National Air Traffic Controllers Association.
G.M. Says Volt Will Get Triple-Digit City
Mileage
NYTIMES
By BILL VLASIC
August 12, 2009
WARREN, Mich. — General Motors said
Tuesday that its Chevrolet Volt extended-range electric vehicle,
scheduled for release in 2011, will achieve a fuel rating of 230 miles a gallon in city driving.
The rating is based on methodology
drafted by the Environmental Protection Agency, and most other
automakers have not revealed the mileage for the electric cars. Nissan,
however, announced last week that its all-electric vehicle, the Leaf,
which comes out in late 2010, would get
367 m.p.g., using the same E.P.A. standards.
Figures for highway driving and
combined city and highway use have not been completed for the Volt, but
G.M.’s chief executive, Fritz Henderson, told reporters and analysts at
a briefing that the car is expected to get more than 100 miles a gallon
in combined city and highway driving.
“Our Chevrolet Volt extended range
electric vehicle will achieve unprecedented fuel economy,” Mr.
Henderson said. “I’m confident that we will be in triple digits.”
The Volt can travel up to 40 miles
on a single battery charge, at which point a small gasoline engine
kicks in and powers the car and simultaneously recharges the battery.
The battery can be charged in eight hours, at an off-peak cost of about
40 cents, Mr. Henderson said.
Nearly 8 of 10 Americans commute
fewer than 40 miles a day, the company said in a statement, citing
Department of Transportation data. The mileage calculation for the Volt
essentially assumes that most drivers would stay within that range and
not need the gasoline engine.
Mr. Henderson said the Volt would be
a critical part of G.M.’s product strategy. “Having a car that gets
triple-digit fuel economy will be a game changer for us,” he said. The
car will go into production late next year.
But whether the Volt can live up to
its billing has been a matter of debate. Some industry analysts note
that General Motors has a poor track record of introducing green
technology to the market.
G.M. is trying to persuade consumers
to return to its showrooms after filing for bankruptcy on June 1 and
emerging as a reorganized company with fewer brands, models and dealers.
Mr. Henderson and other G.M.
executives met with groups of consumers on Monday to hear their
thoughts on the company’s product lineup.
“We need to communicate what we
have,” Mr. Henderson said. “The only way we’re going to make G.M. great
again is to win in the market.”
The Volt is expected to be both a
so-called halo car to draw consumers to the Chevrolet brand, and a
technological foundation for future electric models.
The company has built about 30 Volts
so far and is testing them in various conditions.
Interest has been building in the
Volt since it was introduced at auto shows in recent years. But with
G.M. now 60 percent government-owned, the car has become a symbol of
the company’s rebirth after its 40-day trip through bankruptcy.
Mr. Henderson said most of G.M.’s
new products would be either passenger cars or fuel-efficient crossover
vehicles. While the company will still build trucks and large sport
utilities, the bulk of its investments will go toward smaller vehicles.
“I think the fundamental premise of
planning for higher fuel prices is the right premise,” he said.
Weekend
Opinionator: Was the Car Rebate Plan a Clunker?
NYTIMES
By Tobin Harshaw
October 30,
2009, 8:17 pm
It’s not every day the White House
comes out with a full frontal assault on a media organization. O.K.,
maybe it is. Still, when that organization is known primarily for
helping consumers locate used Toyota Camrys, we can be forgiven for
wondering if things have spun out of control.
This all started with a report on
the federal Car Allowance Rebate System at Edmunds.com, the automotive
Web site owner. “Cash for Clunkers cost taxpayers $24,000 per vehicle
sold,” the study found. “Nearly 690,000 vehicles were sold during the Cash for
Clunkers program … but Edmunds.com analysts calculated that only
125,000 of the sales were incremental. The rest of the sales would have
happened anyway, regardless of the existence of the program.” (At the
link, there’s a nifty chart below containing the actual seasonally
adjusted annual sales rates compared with Edmunds.com’s forecasted rate
if the program had never existed.)
It’s understandable that those
behind the rebate plan were not pleased. Nonetheless, the White House
response — from Macon Phillips, its director of new media — had all the
subtlety of a blunderbuss:
Busy Covering Car Sales on Mars,
Edmunds.com Gets It Wrong (Again) on Cash for Clunkers
On the same day that we found
out that motor vehicle output added 1.7% to economic growth in the
third quarter – the largest contribution to quarterly growth in over a
decade – Edmunds.com has released a faulty analysis suggesting that the
Cash for Clunkers program had no meaningful impact on our economy or on
overall auto sales. This is the latest of several critical “analyses”
of the Cash for Clunkers program from Edmunds.com, which appear
designed to grab headlines and get coverage on cable TV. Like many of
their previous attempts, this latest claim doesn’t withstand even basic
scrutiny.
Specifically, Phillips takes on two
of the assumptions at Edmunds:
1. The Edmunds’ analysis rests on the
assumption that the market for cars that didn’t qualify for Cash for
Clunkers was completely unaffected by this program.
In other words, all the other
cars were being sold on Mars, while the rest of the country was caught
up in the excitement of the Cash for Clunkers program. This analysis
ignores not only the price impacts that a program like Cash for
Clunkers has on the rest of the vehicle market, but the reports from
across the country that people were drawn into dealerships by the Cash
for Clunkers program and ended up buying cars even though their old car
was not eligible for the program …
2. Edmunds also ignores the
beneficial impact that the program will have on 4th Quarter GDP because
automakers have ramped up their production to rebuild their depleted
inventories.
Major automakers including
GM, Ford, Honda and Chrysler all increased their production through the
end of the year as a result of this program, which will help boost
growth beyond the third quarter. The actions of private market
participants, who would not increase production if they didn’t think
demand for their product would be there through the end of the year, is
a far better indicator of market dynamics – and one that Edmunds.com
conveniently ignores.
Most importantly, this
program is helping boost our economy and create jobs now when we need
it most. In a comprehensive report, the Council of Economic Advisers
estimated that the Cash for Clunkers will create 70,000 jobs in the
second half of 2009. The strength of recent auto sales data suggest
that, if anything, this projection underestimates the actual impact of
the program. CEA’s analysis is transparent and comprehensive, laying
out all of its assumptions for the public to understand. Edmunds.com,
on the other hand, is promoting a bombastic press release without any
public access to their underlying analysis.
So put on your space suit and
compare the two approaches yourself.
I’ll leave my Tang behind, thanks,
but will investigate further. Edmunds, naturally, had a response:
Apparently, the $24,000 figure caught
many by surprise. It shouldn’t have. The truth is that consumer
incentive programs are always hugely expensive when calculated by
incremental sales — always in the tens of thousands of dollars. Cash
for Clunkers was no exception.
The White House claims that
our analysis was based on car sales on Mars and that on Earth, the
marketplace is connected. We agree the marketplace is connected. In
fact, that is exactly the basis of our analysis.
It is also claimed we missed
the possibility that Cash for Clunkers generated excitement and
consumers bought vehicles even if they didn’t qualify for the program —
a claim that has been widely supported by anecdote but by little
analysis. It does, after all, seem a bit odd that masses of consumers
would elect to buy a vehicle because of a program for which they don’t
qualify — doubly so when you add in the fact that prices shot up during
Cash for Clunkers, creating a disincentive to buy.
Finally, the White House
claims that the increase in fourth-quarter production reported by the
car manufacturers can be attributed to Cash for Clunkers. But here is a
better reason: the economy is recovering accompanied by improved car
sales. No manufacturer increases production — a decision with long-term
consequences — based on the 30-day sales blip triggered by an event
like Cash for Clunkers.
With all respect to the White
House, Edmunds.com thinks that instead of shooting the messenger,
government officials should take heart from the core message of the
analysis: the fundamentals of the auto marketplace are improving faster
than the current sales numbers suggest.
Isn’t this a piece of good
news we can all cheer?
Good question. The answer: of course
not! This is politics, after all. And Joe Weisenthal at The Business
Insider thinks it’s bad politics, at that. “It is an odd, and we’d say
regrettable, pattern of this White House that it lets itself get
dragged down into fights with specific media outlets,” he writes.
“Seriously, what’s the point of this? Clunkers is over. It just makes
The White House look thin-skinned, though it’s great publicity for
Edmunds. And yes, Clunkers massively distorted this morning’s GDP
number … but we’re with Edmunds that it was a giant waste with little
long-term benefit.”
Weisenthal’s thinking is clearly
informed by his colleague Vincent Fernando, who brings to our attention
a chart showing that the rosy economic growth figures released this
week — GDP was up by 3.5 percent — were themselves distorted by Cash
for Clunkers.
According to the Bureau of Economic
Analysis (BEA), motor vehicle output spiked a seasonally-adjusted
157.6% quarter on quarter. This is completely unprecedented. Vehicle
output is clearly going off a cliff next quarter. The question will be
how low can the blue line below go.
Next quarter, we won’t just
be returning to business as usual for auto output. Don’t forget that
Cash for Clunkers pulled future auto demand, ie. some of Q4 demand,
into Q3. Thus Q4 is likely to be very weak since many people who
planned to buy a car in Q4 probably took advantage of Clunkers and
bought in Q3.
To put this into GDP terms,
according to the BEA the spike you see below added 1.66% to the U.S.
GDP growth figure reported. Thus without it, GDP growth would have been
only 1.89% (3.5% - 1.66%) in Q3.
Now imagine if next quarter
the blue line below goes down into negative territory as it did just
two quarters ago. Next quarter, not only are we unlikely to get Q3’s
boost, but motor vehicle output data could subtract from GDP as well.
So watch out for the cliff…
Ed Morrissey at Hot Air thinks
Edmunds let the White House off the hook when it came to the larger
economic questions:
In fact, Edmunds actually avoided the
argument made by some critics of the program, who said that most of the
sales in the C4C program came at the expense of future sales. All
Edmunds noted with their analysis was that about 5/6ths of the sales
would have occurred without taxpayer subsidies, which made the cost of
getting the other 1/6th into new cars a very expensive proposition.
Instead of addressing that argument, the administration made arguments
about Mars instead.
If the economy has begun to
truly improve, of course car sales will increase over the disastrous
performance of earlier this year. However, that relies on actual
growth, not gimmicky and momentary incentives from the government,
which makes the third quarter auto performance an unreliable indicator
of longer-term health (and the same applies to new-home sales as well,
another major contributor to Q3’s growth number). But even with actual
growth, the 540,000 people who used taxpayer subsidies to buy last
year’s models won’t be heading into showrooms for at least a couple of
years to buy new models rolling off the line now or later.
The administration’s reaction
once again reveals a very thin skin and a temperament perhaps suited to
campaigning, but certainly not towards governing. When will the White
House grow up?
Politico’s Josh Gerstein points out
what he sees as a weakness in the White House’s argument:
The White House also complains that
Edmunds.com is being opaque about its data.
However, some of the wording
in Phillips’s post may also suffer from a degree of opacity. For
example, when he talks about “the price impacts that a program like
Cash for Clunkers has on the rest of the vehicle market,” I think he’s
referring to the fact that demand driven by the program may have led
some car buyers to pay more than they would have otherwise.
Of course, driving up car
prices is a two way street. The Council on Economic Advisers analysis
of the clunkers program notes that prices for and values of used cars
may have gone up since so many were permanently taken out of the mark.
That could benefit car owners, at least theoretically.
The Obama administration isn’t
without its backers here. According to the Detroit News, they include
Mike Jackson, the chief executive of AutoNation, the country’s largest
car retailer:
While Edmunds is usually highly respected
within the automotive industry for its accuracy and reliability,
[Jackson] said, its analysis of the cash for clunkers program is
“shoddy.”
“Simply put, they’ve
misrepresented the facts, and the White House is completely justified
in calling them out on it,” Jackson said, adding that it appears
“Edmunds’ political views have tainted their usual rigorous approach to
research.”
“I know from our sales at
AutoNation just how significant the impact of the cash for clunkers
promotion was in our dealerships, and our own internal figures indicate
that the rate of increase was consistent with what other retailers,
manufacturers and governmental agencies have been estimating,” he said.
“We believe that the
incremental sales are over 500,000 new vehicles. Edmunds may not want
to believe Ford or General Motors or Moody’s or the White House or any
of the dozens of other reliable parties who saw significant sales
increases as a direct and indirect result of the program, but that
doesn’t make the increases any less real.”
The Wall Street Journal’s Evan
Newmark, however, thinks its the government that’s playing fast and
loose with numbers:
The White House would probably contend
that it’s impossible to determine incremental sales — meaning each sale
that only happened because of the government $3,500 to $4,500 subsidy.
And that the sale of each and every car spurs economic activity well
beyond the program’s $3 billion.
But isn’t it possible that
the Edmunds.com analysis is actually understating the true costs to the
taxpayer? What about the interest costs on the borrowed $3 billion?
What about the cost of propping up GMAC so that it could underwrite
cash-for-clunker loans?
That’s the catch with all
this government intervention — lots of unforeseen consequences. And we
never learn. The trillion dollar disasters with Fannie Mae and Freddie
Mac haven’t stopped the government from tinkering with the housing
market.
Speaking of unforeseen consequences,
The Wall Street Journal editorial board highlights what it thinks is a
whale of one:
We thought cash for clunkers was the
ultimate waste of taxpayer money, but as usual we were too optimistic.
Thanks to the federal tax credit to buy high-mileage cars that was part
of President Obama’s stimulus plan, Uncle Sam is now paying Americans
to buy that great necessity of modern life, the golf cart.
The federal credit provides
from $4,200 to $5,500 for the purchase of an electric vehicle, and when
it is combined with similar incentive plans in many states the tax
credits can pay for nearly the entire cost of a golf cart. Even in
states that don’t have their own tax rebate plans, the federal credit
is generous enough to pay for half or even two-thirds of the average
sticker price of a cart, which is typically in the range of $8,000 to
$10,000. “The purchase of some models could be absolutely free,” Roger
Gaddis of Ada Electric Cars in Oklahoma said earlier this year. “Is
that about the coolest thing you’ve ever heard?”
Umm, not really — at least as far as
Nick Loris of the Heritage Foundation is concerned:
The story speaks for itself for the most
part but there are a few points to take away here. 1.) If you subsidize
something enough, people will buy it. But that money has to come from
somewhere – either from borrowing it or raising taxes. Edmunds.com
reports that it cost $24,000 in taxpayer money for each car sold and is
now in a back-and-forth with the White House. Edmunds claims cash for
clunkers affected the timing of sales more than the volume of sales.
2.) We’re talking about breakdowns in a small scale government program
here. Think of the loopholes in a much more complex, convoluted like a
cap and trade program.
Nancy Scola at Personal Democracy
Forum thinks the whole kerfuffle raises questions about the White
House’s Web reaction team:
The White House new media operation is in
some ways a strange hybrid. Organized in the White House hierarchy as
part of the White House communications team, it seems to be using its
innovative blog here as more or less the online component of the
traditional White House press operation — albeit with a more bloggy,
calling-folks out-by-name feel to it. Smart? Inappropriate? Inevitable,
given the flattened way media works today where information flows from
sources traditional and otherwise? You be the judge,…
Actually, Tom Burners at NewsBusters
will be the judge, thank you very much:
We’re just going to have to get used the
fact that we’re long past the point where we should expect dignity and
stick-to-the-facts restraint from this White House. Going after its
critics is something the previous Bush 43 & Co. should have done
more, but on the rare occasions when it did, it conducted itself and
framed its language appropriately.
Such is clearly not the case
with the current bunch, which more and more looks like a collection of
thin-skinned crybabies than the occupiers of the highest administrative
perch in the land …
Clearly, it’s not enough for
Phillips to dispute the Edmunds analysis, which is of course subject to
scrutiny like any other. From a position of perceived power as a de
facto administration spokesperson, the White House blogger clearly made
it a point to ridicule and disparage Edmunds, sending a clear message
to anyone else considering dissenting from what the White House
considers the conventional wisdom that they will be subjected to
similar treatment…
If something like this had
come from Bush 43’s White House, the cries of “stifling dissent” from
the establishment media would have been loud and long. Though others
have picked up the story, their coverage is far more muted compared to
what we would likely have seen just a year ago.
Truth be told, “something like this”
did come from George W. Bush’s White House. Indeed, it appears that
some Fox News conservatives thought the attack on NBC didn’t go far
enough. But then, it’s also worth noting that some on the left bashed
the Bush administration for the sort of heavy-handedness the Obama gang
is now indulging in. The moral: if you’re going to get involved in
these politicians vs. the media spats, just remember that everything
you say will someday be held against you. Think of it as Quotes for
Clunkers.
Rebates for ‘Clunkers’ Aid Ford Most as
Car Sales Climb
NYTIMES
By NICK BUNKLEY
August 4, 2009
DETROIT — The government’s “cash for
clunkers” program gave automakers a desperately needed sales boost in
July, though their relief could be short-lived if the Senate does not
vote to extend the trade-in program after it ran out of money within
days of starting.
The Ford Motor Company said Monday
that its United States sales rose 2.3 percent last month, marking the
first year-over-year increase for any of the six largest carmakers
since last August. Ford had not posted a monthly sales increase in
nearly two years. Ford’s compact sedan, the Focus, was the most common
selection by people who used the trade-in program, the government said
Monday.
General Motors and Chrysler fared
better than in recent months but did not benefit from the program as
much as Ford, which heavily promoted the government-sponsored rebate
program at its dealerships, in television ads and on its Web site. G.M.
reported a 19 percent decline in July from a year ago, and Chrysler
said sales fell 9 percent.
Honda’s sales fell 17 percent.
Volkswagen reported a 0.7 percent increase. Over all, automakers said
the new-vehicle selling rate rose in July to its highest level in 11
months. Through the first half of this year, sales were down 35 percent
compared to the first half of 2008.
“I challenge anyone to show me a
one-week program that has had as much benefit to the consumer and as
much impact on the environment as this one has,” George Pipas, Ford’s
chief sales analyst, said on a conference call Monday.
Ford said sales of seven of its
models rose at least 60 percent last month. It sold 18 percent more
cars and crossover vehicles than it did in July 2008, though sales of
its trucks and sport utility vehicles fell 18 percent. The company did
not say how many of its sales were made to people who turned in a
vehicle to be scrapped under the program.
All three Detroit automakers said
the flurry of demand in the final week of July left their inventories
of unsold vehicles at the lowest levels in many years.
The government trade-in program,
which began July 24, lets consumers give up an older, inefficient
vehicle and receive a credit of up to $4,500 toward the purchase of a
new vehicle with a higher fuel economy rating. Its unexpected
popularity caused the program, formally known as the Car Allowance
Rebate System, to quickly exhaust its initial budget of $1 billion,
which was enough for about 200,000 people to take part.
The House of Representatives voted
Friday to provide $2 billion more, and approval from the Senate is
needed to extend the program. Many dealers are now unsure whether to
continue taking trade-ins under the program, not knowing if the
government will reimburse them.
Automakers welcomed the program at a
time when high unemployment and low consumer confidence levels have
pushed new-vehicle sales to their lowest level since the recession of
the early 1980’s. Even if Congress allows the program to end suddenly,
officials at G.M. say they are seeing more reasons for optimism in the
months ahead, both in the latest economic data and in reports from
their dealers.
“Clearly momentum is starting to
build for a recovery, and we’re really starting to see car buyers
return to the showrooms,” Michael C. DiGiovanni, G.M.’s chief sales
analyst, said. “The bankruptcy talk and issues are clearly getting
behind us.”
The Transportation Department said
Monday afternoon that based on 80,500 cash-for-clunker applications —
which officials believe is about a third of the total deals so far —
average fuel economy of the new vehicles was 9.6 miles per gallon
better than the old ones, 25.4 m.p.g. versus 15.8 m.p.g., an
improvement of 60.8 percent. The improvement, the department pointed
out, is much larger than the minimum required to be eligible for the
government rebate: a gain of four miles per gallon for cars and two
miles per gallon for trucks.
Part of the reason for the gain was
that some people were turning in old trucks for new cars. So far, 83
percent of the “clunkers” were trucks or S.U.V.’s and 60 percent of the
new vehicles were cars, the department said.
The department also said that Ford,
G.M. and Chrysler supplied 47 percent of the new vehicles, slightly
more than their overall share of the market, which is 45 percent. Four
of the top 10 were also made by American companies, the department
said. Of the remainder, it said, “preliminary analysis suggests that
well over half of these new vehicles were manufactured in the United
States.”
Lawmakers Say Have Accord on Derivatives
Oversight
NYTIMES
By THE ASSOCIATED PRESS
Filed at 6:04 p.m. ET
July 30, 2009
WASHINGTON (AP) -- Two influential
House lawmakers have announced an agreement on guidelines for
legislation to impose broad new oversight on the financial instruments
blamed for hastening the global economic crisis.
They say the House could vote in
September on a bill to regulate derivatives, a crucial element of
Congress' effort to overhaul the system of financial rules.
The legislative outline agreed to by
Democratic Reps. Barney Frank, chairman of the House Financial Services
Committee, and Collin Peterson, who heads the House Agriculture
Committee, closely resembles the Obama administration's proposed plan
for regulating derivatives.
Both proposals involve a new network
of clearinghouses to provide transparency for trades in credit default
swaps and other derivatives.
5 Directors Added
to New G.M. Board
NYTIMES
By NICK BUNKLEY
July 24, 2009
DETROIT — General Motors filled out its new board on Thursday and
announced a wave of management changes, including the retirements of
several longtime executives and the elimination of some vice president
jobs.
The Treasury Department named four more directors to represent its 60
percent stake in the automaker. They are Daniel F. Akerson, managing
director of the private equity firm Carlyle Group; David
Bonderman,
co-founding partner of TPG Capital; Robert D. Krebs, retired chairman
and chief executive of the Burlington Northern Santa Fe railroad; and
Patricia F. Russo, former chief executive of the telecommunications
company Alcatel-Lucent. The Treasury has appointed a total of 10
members to the new G.M. board.
Carol Stephenson, dean of the Richard Ivey School of Business at the
University of Western Ontario, will represent the Canadian government,
which owns 11.7 percent.
They will join eight others on the board, including the recently
appointed chairman, Edward E. Whitacre Jr., and G.M.’s chief executive,
Fritz Henderson. Each member who is not a G.M. employee will be paid a
cash retainer of $200,000 a year. Mr. Whitacre will be paid at least
$350,000.
Several of the new directors, including Mr. Whitacre, the former
chairman of AT&T, have experience in the telecommunications
industry but none have automotive backgrounds. The Obama administration
wanted nearly a clean slate of directors to ensure that the company
would move away from practices that led to its downfall and last
month’s bankruptcy filing.
“The members of this new board of directors bring immense experience
and diverse perspectives to the table, and that’s exactly what G.M.
needs,” Mr. Whitacre said in a statement. “The collective expertise of
the new B.O.D. is vital at this time as G.M. seeks to redefine itself
as the vehicle design and customer care leader of the extremely
competitive auto business.”
The Treasury, in a statement, said it was “grateful to Chairman Ed
Whitacre and all these exceptionally distinguished individuals for
being willing to serve this great American company at a critical
juncture. We are confident that, under their guidance, G.M. can achieve
great success in the years ahead.”
Meanwhile, G.M. said five top executives would retire, including the
president of its North American operations, Troy Clarke. This month,
Mr. Henderson assumed the responsibilities of Mr. Clarke, 54, who has
been at G.M. for 36 years and was widely believed to be on his way to
one of the company’s top jobs.
Also retiring by year’s end will be Gary Cowger, the group vice
president for global manufacturing and labor relations; Ralph Szygenda,
the chief information officer; Maureen Kempston Darkes, group vice
president for Latin America, Africa and the Middle East; and Michael
Grimaldi, a vice president and chief executive of G.M. Daewoo in South
Korea.
Mark LaNeve, a G.M. North American vice president whose future at G.M.
seemed in doubt after his marketing duties were reassigned this month
to Vice Chairman Robert A. Lutz, will remain at G.M. as vice president
of United States sales.
Other changes involve separating some sales and marketing jobs and
changing vice president positions to nonexecutive managerial roles.
Bryan Nesbitt, G.M.’s vice president for design in North America, will
be general manager of the Cadillac brand, and Ed Peper, who has been
the head of Chevrolet, will be Cadillac’s general sales manager.
Obama’s Strategy to Reverse
Manufacturing’s Fall
NYTIMES
By LOUIS UCHITELLE
July 21, 2009
If the Obama administration has a
strategy for reviving manufacturing, Douglas Bartlett would like to
know what it is.
Buffeted by foreign competition, Mr.
Bartlett recently closed his printed circuit board factory, founded 57
years ago by his father, and laid off the remaining 87 workers. Last
week, he auctioned off the machinery, and soon he will raze the factory
itself in Cary, Ill.
“The property taxes are no longer
affordable,” Mr. Bartlett said glumly, “so I am going to tear down the
building and sit on the land, and hopefully sell it after the recession
when land prices hopefully rise.”
Though manufacturing has long been
in decline, the loss of factory jobs has been especially brutal of
late, with nearly two million disappearing since the recession began in
December 2007. Even a few chief executives, heading companies that have
shifted plenty of production abroad, are beginning to express alarm.
“We must make a serious commitment
to manufacturing and exports. This is a national imperative,” Jeffrey
R. Immelt, chairman and chief executive of General Electric, said in a
speech last month, while acknowledging that G.E. was enriched by its
overseas operations too.
President Obama, agreeing in effect,
has declared, “The fight for American manufacturing is the fight for
America’s future.”
The United States ranks behind every
industrial nation except France in the percentage of overall economic
activity devoted to manufacturing — 13.9 percent, the World Bank
reports, down 4 percentage points in a decade. The 19-month-old
recession has contributed noticeably to this decline. Industrial
production has fallen 17.3 percent, the sharpest drop during a
recession since the 1930s.
So far, however, Mr. Obama’s
administration has not come up with a formal plan to address the rapid
decline. Instead, it has pursued ad hoc initiatives — bailing out
General Motors and Chrysler, for example, and pushing green energy by
supporting the manufacture of items like wind turbines and solar panels.
“We want to make sure that we grow a
manufacturing base for renewable energy,” said Matthew Rogers, a senior
adviser in the Energy Department, explaining that this is being
accomplished in part by “accelerating loan guarantees from zero” in the
Bush years.
Xunming Deng, a physicist and the
chairman of the Xunlight Corporation, sees himself as a beneficiary of
what he describes as the Obama administration’s more flexible loan
guarantees. His factory in Toledo, Ohio, with 100 employees, is in the
early stages of making solar panels, and Dr. Deng is already planning
to quadruple the plant’s size. He has applied to the Energy Department
for a $120 million loan guarantee. If he gets it, he will not have to
pay the hefty fees charged for loan guarantees before Mr. Obama took
office.
“Getting rid of that fee makes the
loan guarantee very attractive and very helpful,” Dr. Deng said. “We
can’t grow as fast without it.”
Beyond energy, the administration’s
approach gradually outlines the elements of a manufacturing policy —
what Lawrence H. Summers, director of the National Economic Council,
described as “a number of things to support manufacturing.”
The auto bailout, for all its
improvisations, served notice that the administration would probably
rescue any giant manufacturer it deemed too big (or too iconic) to
fail, and would help the suppliers of failing giants transition to
other industries.
The Buy America clause in the
stimulus package pointedly favors the purchase of American-made goods
for infrastructure projects. The Commerce Department is adding $100
million, more than double the current outlay, to a program that helps
American manufacturers operate more effectively. And trade agreements
negotiated by the Bush administration — agreements that would make the
United States more open to imported manufactured goods — have been
allowed to languish in Congress.
“The administration’s policy is
evolving in the right direction,” said Representative Sander M. Levin,
Democrat of Michigan, who is particularly concerned about auto imports.
“I think they have essentially shed the political chains that prevented
government from having a role in manufacturing. They are working their
way toward what makes sense.”
Not everyone agrees.
“Bush and Obama,” Mr. Bartlett said
scornfully, “one is as bad as the other in terms of manufacturing
policy.”
He acknowledged that the recession
was the immediate reason for the demise of his family’s business. But
what really did it in, he said in an interview, was the competition
from less expensive Chinese circuit boards — less expensive, he argued,
because the Chinese undervalue their currency and this administration,
like the ones before it, lets them get away with it.
“Our orders went from $8 million at
an annual rate to $4 million, which was not enough to make money,” he
said.
Mr. Bartlett, who is co-chairman of
an organization called the Fair Currency Coalition, said that Chinese
competitors charged only $1 for each printed circuit board sold in this
country, while he charged $1.40. Like many economists and government
officials, he says he believes the Chinese currency is artificially
undervalued. As a countermeasure, he said the Obama administration
should impose a 40 percent tariff on imported Chinese goods.
“I can compete against Chinese
entrepreneurs, and Chinese labor cost is not that big a factor,” he
said, “but I cannot compete against the Chinese government’s
manufacturing policies.”
Manufacturing has long been viewed
as an essential pillar of a powerful economy. It generates millions of
well-paid jobs for those with only a high school education, a huge
segment of the population. No other sector contributes more to the
nation’s overall productivity, economists say. And as manufacturing
weakens, the country becomes ever more dependent on imports of
merchandise, computers, machinery and the like — running up a trade
deficit that in time could undermine the dollar and the nation’s
capacity to sustain so many imports.
One tactic for strengthening the
manufacturing sector, in the administration’s view, would be a shift in
tax policy. The research and development tax credit, which is now
subject to renewal by Congress, would be made permanent, encouraging
much more R.& D. among manufacturers, a senior Commerce Department
official argued. And foreign taxes paid on profits earned overseas
would not be deductible in this country until the profits were
repatriated, a restriction that might discourage locating factories
abroad.
The goal is to arrest
manufacturing’s dizzying decline. It “was the pillar on which we built
the middle class,” said Thea Lee, policy director for the
A.F.L.-C.I.O., “and it is hard to see how you rebuild the middle class
without reviving manufacturing.”
Autos Lift Retail Sales as
Inflation Perks Up
NYTIMES
By REUTERS
July 14, 2009
Filed at 9:13 a.m. ET
WASHINGTON (Reuters) - A jump in auto and gasoline sales boosted U.S.
retailers in June, while a measure of inflation soared by twice as much
as expected, bolstering hopes the economy was finally beginning a
modest recovery.
Commerce Department data on Tuesday showed sales at U.S. retailers rose
0.6 percent from a month earlier, ahead of economists' expectations for
a 0.4 percent advance.
A separate report from the Labor Department showed producer prices
jumped 1.8 percent last month, far outstripping forecasts for a 0.9
percent gain.
U.S. stock index futures stayed in positive territory after the
economic data, but U.S. government debt prices extended losses. The
euro held on to slender gains vs dollar, but the dollar extended gains
against the yen.
Excluding autos and parts, which recorded a 2.3 percent gain, retail
sales were up a more modest 0.3 percent, short of analysts'
expectations for a 0.5 percent advance.
"It's not horrible, but clearly there's not much of an acceleration,"
said Keith Hembre, chief economist at First American Funds in
Minneapolis.
"That reflects the ongoing weakness in income levels. It looks like gas
and vehicle sales were really the big driver, accounting for just about
all of the overall increase."
Gasoline stations showed strong gains, helped by rising prices. The
average price per gallon of gas rose to $2.68 in June from $2.32 in
May, according to government data.
Excluding both autos and gasoline, sales were down 0.2 percent, the
fourth consecutive monthly decline. Department stores and restaurants
were among the laggards, suggesting that consumers remained reluctant
to resume discretionary spending despite signs the recession may be
drawing to a close.
The Producer Price Index, which measures prices received by farms,
factories and refineries, recorded its steepest gain since November
2007, the Labor Department said.
Core prices, which strip out volatile food and energy costs, rose a
much greater-than-expected 0.5 percent, boosted by car and truck sales.
Analysts polled by Reuters were looking for a 0.1 percent increase in
the core PPI.
Energy prices rose 6.6 percent as gasoline costs surged 18.5 percent.
Both were the biggest rises since November 2007.
Light truck prices rose 3.4 percent, the largest gain since November
2006, while passenger car prices increased 2 percent, the steepest rise
since September of that year.
Compared with the same period last year, however, producer prices fell
4.6 percent.
Consumer Loan
Delinquencies Continue to Rise
NYTIMES
By THE ASSOCIATED PRESS
Filed at 10:02 a.m. ET
July 7, 2009
NEW YORK (AP) -- A banking group says consumer loan delinquencies rose
to another record high in the first quarter.
The American Bankers Association says a continued rise in unemployment
has been the main culprit for the continued rise in delinquencies.
The trade association said Tuesday the composite delinquency rate among
eight types of closed-end installment loans rose to 3.23 percent. That
is the highest recorded since the ABA began tracking the rate in the
mid 1970s and tops the previous record of 3.22 percent set in the last
quarter of 2008.
Aside from rising delinquencies among close-end loans, the ABA said
credit card delinquencies also moved higher in the first quarter.
G.M. and
Chrysler Liability Differences
NYTIMES
By Christopher Jensen
July 1, 2009, 8:30 am
As
General Motors and Chrysler go through bankruptcy, the casual observer
might think there would be some consistency in how consumers are
treated. But when it comes to injuries or deaths caused by safety
defects, current owners of G.M. vehicles are likely to get a much
better deal.
There is something very wrong with that, said Norman Silber, a law
professor at Hofstra University, where he teaches consumer law.
“Justice is not supposed to be a lottery system,” he wrote in an e-mail
message.
Last month, a bankruptcy judge granted Chrysler’s request that it not
be held liable for product-liability suits filed by people who already
owned a Chrysler, Dodge or Jeep. The argument was that it was unfair to
burden the new company with such obligations.
According to Robert L. Nardelli, then-chief executive of Chrysler, the
idea of a “get-out-of-court-free”
card came up during talks between
Fiat and the Treasury Department.
Consumer groups such as Public Citizen, the Center for Auto Safety, and
Consumers for Auto Reliability and Safety were outraged and dismayed.
Who was representing the rights of consumers in those chats? they
wondered. Chrysler had abandoned and betrayed people who trusted the
company and bought its vehicles.
That’s exactly the kind of negative image that G.M. does not want to
project as it now goes through bankruptcy. A G.M. spokesman declined to
discuss the matter, but in the last week G.M. has told a bankruptcy
court in Manhattan that it is willing to accept responsibility for
owners of current vehicles, who have accidents in the future and file
product-liability suits.
The judge has yet to approve that plan, but assuming it goes through,
here’s the kind of weirdness that could result, according to Mr. Silber.
“Think about Victim A, who is for instance crushed by the roof of a
poorly designed Chrysler that she happens to be a passenger in,” he
said. “She would probably find it impossible even to find a lawyer to
represent her where there is no responsible party from whom to recover.
Then, think about Victim B, crushed by the roof of a defective G.M.
car, who as fate would have it, can recover damages.”
Mr. Silber said the situation with Chrysler “deserves revisitation —
especially since both these companies are receiving subsidies” from
taxpayers. But he admitted that he doesn’t see how that could happen.
What
G.M. and Chrysler share is how they would treat people who have already
had accidents and are either involved in suits or are preparing them.
And that is basically to abandon them, consumer advocates said.
Chrysler got the okay to leave those people and their suits behind,
forcing them to be satisfied with whatever money the old Chrysler has
left to pay off creditors — virtually nothing.
“Unfortunately, General Motors is trying to do the same thing that the
Chrysler bankruptcy did,” said Adina Rosenbaum, a lawyer for Public
Citizen. That leaves hundreds of suits involving people who were badly
injured or killed unable to bring claims against the new G.M., she said.
Mr. Silber said there was also an economic downside for current
Chrysler, Dodge and Jeep owners. As more people become aware of the
legal limitations on those vehicles, their value was likely to drop.
The one slightly positive aspect of this episode might be greater
awareness of the need for a change in how bankruptcies are handled, he
said.


New Obama Initiative Seeks Fix to Finance Regs
NYTIMES
By THE ASSOCIATED PRESS
Filed at 9:32 a.m. ET
June 17, 2009
WASHINGTON (AP) -- A new consumer protection agency highlights a
financial system overhaul President Barack Obama plans to unveil
Wednesday in effort to avert future economic crises like the one still
wreaking havoc at home and around the globe.
Obama's sweeping change of business regulation also embraces new powers
for the Federal Reserve and new rules that would reach into currently
unregulated regions of the financial markets. An 85-page draft details
an effort to change a regime that Obama's economic team maintained had
become too porous for the innovations and intricacies of the today's
financial markets.
With Congress already embroiled in health care legislation, Obama has
set an ambitious schedule, pushing lawmakers to adopt a new regulatory
regime by year's end. The consumer agency would ride herd on credit and
lending practices that largely went undetected as the economy was
sliding into a deep recession.
Obama said Tuesday he will put forward ''a very strong set of
regulatory measures that we think can prevent this kind of crisis from
happening again.''
Christina Romer, who heads the Council of Economic Advisers, called it
an ''appropriate balance'' and said the administration was ''not
bulldozing the whole system.'' But House Republican Leader John Boehner
said that it would have ''the federal government deciding what interest
ought to be charged on credit cards'' and what financial products are
available.
''I think it's just going to be too big of a foot on an industry that
already is having financial problems,'' Boehner said in an appearance
on ABC's ''Good Morning America'' Wednesday.
The financial sector and lawmakers from both parties concede the need
for significant changes in the rules that govern the intricate and
interconnected world of banking and investment. But the details of
Obama's proposal already are facing resistance, signaling a tough sell
for a president who is spending major political capital on his health
care overhaul.
Under Obama's plan, the Fed would gain power to supervise
holding companies and large financial institutions considered so big
that their failure could undermine the nation's financial system. But
even as it gains new powers, the Fed also would lose some banking
authority to a new Consumer Financial Protection Agency.
Obama's proposal would require the Fed, which now can independently use
emergency powers to bail out failing banks, to first obtain Treasury
approval before extending credit to institutions in ''unusual and
exigent circumstances.''
The expanded Fed role and the new consumer regulator are likely to be
the two main political flash points in the administration's proposal.
Many bankers oppose a new consumer protection regulator and many
lawmakers worry the Fed could become too powerful. Friction over those
points could slow any major overhaul.
Besides having the Federal Reserve supervise ''systemically
significant'' institutions, Obama will recommend a council of
regulators, which would include the Fed, to monitor risk throughout the
broader financial system. The arrangement is designed to prevent
crashes like those that felled AIG and Lehman Brothers.
In conjunction with the Fed's authority over large financial
institutions and the new consumer agency, Obama also will propose:
-- Additional protections for investors, including greater disclosure
by hedge funds; regulation of credit default swaps and over-the-counter
derivatives that previously operated outside of government oversight;
and new conditions on brokers and originators of asset-backed
securities.
-- A system for the orderly disposition of any troubled, interconnected
firm whose failure poses a risk to the entire financial system,
together with rules that insist that financial institutions hold more
capital to avoid over-leveraging.
Obama's plan does not attempt major consolidation of turf-conscious
regulatory agencies and does not inject itself into an ongoing debate
over whether to bring some insurance companies under federal oversight.
''We don't want to tilt at windmills,''
Obama said on CNBC.
Obama's decision to create a consumer agency comes amid criticism that
mortgage lenders and credit card companies have taken advantage of
unwitting customers and saddled them with debt.
The new regulator would have the power to demand that customers have
the option of simple financial products, to impose fines and to allow
states to pass laws that are stricter than the federal standards.
Consumer protections are now spread among various state and federal
authorities, including the Fed, the Securities and Exchange Commission,
the Federal Trade Commission and banking regulators.
Financial lobbyists rallied against the new agency, saying it's
impossible to separate bank regulation from oversight of the products
they offer.
Democratic Sen. Christopher Dodd of Connecticut, chairman of the Senate
Banking, Housing and Urban Affairs Committee, has advocated an
alternative plan to strip the Fed of its regulatory role entirely and
create a new consolidated bank regulator that would assume the roles
that the Fed and Federal Deposit Insurance Corp. now play in helping
regulate state-chartered banks.
Dodd, however, is a strong proponent of a consumer protection agency
and is likely to champion that component of Obama's plan.
------
Associated Press writers Anne
Flaherty, Dan Wagner and Jeannine Aversa contributed to this report.
On the Net:
Federal Reserve: www.federalreserve.gov
Securities and Exchange Commission: www.sec.gov
Federal Deposit Insurance Corp.: www.fdic.gov
Treasury Department: www.ustreas.gov
White House Council of Economic Advisers:
http://www.whitehouse.gov/administration/eop/cea/
Financial Services Roundtable: http://www.fsround.org/
Federal Trade Commission: http://www.ftc.gov/
Treasury Lets 10 Big Banks
Start to Repay Bailout Money
NYTIMES
By ERIC DASH
June 10, 2009
The Treasury Department cleared the way for 10 big banks on Tuesday to
start repaying billions of dollars in taxpayer aid, a crucial step in
easing the government’s grip after an unprecedented series of
interventions.
JPMorgan Chase and Goldman Sachs were among the banks deemed strong
enough by federal regulators to leave the Troubled Asset Relief
Program, or TARP, after months of lobbying and strong performances on
recent stress tests.
The 10 banks are expected to return about $68.3 billion to the Treasury
Department, more than double the administration’s initial estimate of
about $25 billion in funds to be returned this year.
The Treasury did not identify the banks, allowing them to come forward
individually. They include American Express, Bank of New York Mellon,
the BB&T Corporation, Capital One Financial, the State Street
Corporation and US Bancorp. Along with JPMorgan and Goldman, they all
passed the stress test and applied to return their TARP funds.
Another bank, Morgan Stanley, which needed to raise $1.8 billion after
the stress test, also received permission, as did Northern Trust, a
large custodial bank that did not undergo the stress test.
President Obama, in comments Tuesday, said that taxpayers “actually
turned a profit” from the deal, but he also offered banks a warning.
“I also want to say: the return of these funds does not provide
forgiveness for past excesses or permission for future misdeeds,” Mr.
Obama said. “It is critical that as our country emerges from this
period of crisis, that we learn its lessons; that those who seek reward
do not take reckless risk; that short-term gains are not pursued
without regard for long-term consequences.”
The $68.3 billion represents about a quarter of the TARP money given to
banks. So far, 22 small community banks have been allowed to return
$1.9 billion in government money.
Within the next few days, the big banks will be able to wire the money
back to the Treasury Department. Still, they will not fully get out
from under the government’s thumb until they rid themselves of warrants
giving taxpayers a share of the potential upside on their investments.
Analysts say warrants for the 10 big banks could be worth as much as
$4.6 billion. Treasury officials have not disclosed how they plan to
value and sell them.
“These repayments are an encouraging sign of financial repair, but we
still have work to do,” the Treasury secretary, Timothy F. Geithner,
said in a statement.
The Obama administration hopes the accelerated payback will show that
its financial recovery programs are working, even if the economy
remains fragile. The move will also free up billions of dollars that
can be redistributed to other troubled banks and companies without
Treasury officials returning to Congress for more money.
Still, the plan is not without risks. The government is giving up $1.8
billion in annual interest payments while leaving its support programs
in place, even for banks that repay. That means that taxpayers are
giving up part of their upside while continuing to be on the hook for
losses.
It could also cause a clear separation of the financial industry’s
strongest and weakest players. Among the big banks not included in
Tuesday’s action are Citigroup, Bank of America and Wells Fargo.
Citigroup, which has accepted $45 billion in taxpayer aid, might not be
able to exit the TARP program for years.
Banking executives have been lobbying to repay TARP money for months,
hoping to free themselves from compensation and other restrictions as
well as the additional scrutiny that came with accepting taxpayer
money. They also hope the government’s seal of approval will give them
a competitive edge and an added jolt to their share price, sustaining a
recent rally.
“Everyone wants to get through this with enough capital, but there
isn’t a bank C.E.O. or board member in the country that didn’t want to
get out as fast as they can,” said Brian R. Sterling, an investment
banker who specializes in financial institutions at Sandler O’Neill in
New York. “It’s expensive. The rules change. And in some markets, the
competitor down the street is putting up billboards saying ‘I’m not a
bailout bank.’ ”
Yet even as they exit the program, banks remain tethered to the
government by a series of programs that were introduced as the credit
crisis worsened. The administration, for example, plans to introduce
new compensation guidelines within the next week that would apply to a
range of financial companies — including those that returned taxpayer
money. TARP recipients, meanwhile, are bound by certain restrictions,
like limits on temporary work visas known as H1-B’s, until they expunge
the taxpayer warrants.
The TARP program was intended last fall as a long-term investment by
the government to get the financial industry through the worst crisis
since the Depression. As the financial system teetered, Treasury
Secretary Henry M. Paulson Jr. called the heads of the nation’s largest
banks to Washington in October and pressed them to accept the money —
regardless of whether they thought they needed it. But when
compensation and other restrictions were attached to calm political
furor over Wall Street bonuses, healthier banks pushed to leave the
program.
In a statement on Tuesday, Mr. Paulson said that he appreciated the
participation of the banks in the program, which had helped stabilize
the financial system.
The Federal Reserve announced last week that it planned to give the
go-ahead to an “initial set” of banks that proved they were strong
enough operate with less government support. Federal officials want to
avoid the political embarrassment and financial risks of allowing a
bank to exit the program only to see it return for more taxpayer aid if
the economy worsens.
Banks had to show regulators their capital levels were high enough to
withstand a severe recession, they could sell a sizable amount of
common stock, and they could begin issuing billions of dollars of debt
without the government’s backing.
Even after they repay the taxpayer money, the banks could face another
showdown with federal officials over the value of warrants. To fully
disentangle themselves from government, banks will have to either allow
the Treasury to auction the warrants or buy them back. The government
has nine years before it is required to sell them.
All told, buying back the warrants could cost the banks as much as $4.6
billion, according to an estimate by Linus Wilson, a finance professor
at the University of Louisiana at Lafayette. Taxpayer warrants in
JPMorgan Chase could be worth $1.7 billion, according to Professor
Wilson’s estimates. Warrants in Goldman Sachs and Morgan Stanley could
be worth well over $600 million each.
Regulators at the Fed, meanwhile, began analyzing the fund-raising
plans on Monday for 10 other banks, which required additional capital
after the stress test. As part of that process, regulators are looking
closely at the banks’ risk management practices and executive team.
Those reviews are expected to be completed in a few weeks.
These
news conferences are art...a version of the Last
Supper, or, as a movie, The Ten Commandments

In name
and logo only???
GM to go green, cut execs, as
it exits from bankruptcy
DAY
By Tom Krisher
Published on 7/9/2009
General Motors could literally turn green as it readies itself for
major management and cultural changes that will coincide with its
escape from bankruptcy protection.
People briefed on its plans say the company is looking into changing
the background color of its corporate logo from blue to green in an
effort to show consumers that it is leaner and greener, more focused on
fuel efficiency and better able to make quick decisions.
Ed Welburn, GM's vice president of design, is leading a group that is
studying name and logo changes, but no recommendation has been made,
according to one of the people. Changing the background of the familiar
square blue-and-white GM logo has been discussed, said the people, who
requested anonymity because no decision has been reached.
What has been decided, though, is the need for management and cultural
changes. New CEO Fritz Henderson is preparing to cut another 4,000
white-collar jobs, including 450 executive-level employees such as
plant managers or engineering group heads. Henderson, under
pressure from the new GM's largest shareholder, the U.S. government,
wants a more nimble company, one that can make decisions faster and is
less bureaucratic than the GM of the past.
In the old GM, several committees often reviewed decisions, holding up
new vehicles and making it slow to respond to market changes. Designs
were often changed from bold to bland, with GM stamping out nondescript
cars such as the old Chevrolet Malibu. With taxpayer dollars and its
very existence on the line, GM can no longer afford to take too long.
So Henderson will thin executive ranks by 35 percent, from about 1,300
to 850 by the end of the year. Total U.S. salaried employment will drop
by 6,150, or 21 percent, from 29,650 at the start of the year to 23,500
by the end. The changes could be announced as soon as Friday
after the courts clear the sale of GM's good assets to a new company
largely owned by the U.S. and Canadian governments and the United Auto
Workers union. They will flatten the automaker's organizational chart,
eliminating work groups and shrinking the organization to match a
smaller footprint, according to the people briefed on the plan.
The flatter organization will make it easier for Henderson to hold
people accountable for their work, while focusing more on product
development and customer service, one of the people said. The new
structure would be similar to one imposed on Chrysler Group LLC by Fiat
CEO Sergio Marchionne, who now controls the company. Marchionne shed
layers of management. General Motors Corp. also could announce a
subcompact car to be built at a Michigan factory, widely believed to be
the four-seat Chevrolet Spark minicar now being sold in China.
GM for years had neglected its small cars, unable to make money on them
because of high labor costs. Instead, it focused more on high-profit
trucks and sport utility vehicles. Its current entries, such as the
Korean-made Chevrolet Aveo subcompact and the U.S.-made Chevrolet
Cobalt compact, have not sold as well as top-selling entries from
Toyota and Honda.
The new GM, however, is betting that car buyers will shift to small as
gas prices swing wildly, and it's trying to upgrade that class of
vehicle. The company says lower labor costs and higher sales prices
should yield more profits. GM is also trying to go leaner by
selling off its European Adam Opel GmbH unit, as well as Sweden's Saab,
and the Hummer and Saturn brands. Pontiac is to be discontinued by the
end of the year, leaving GM with only four brands - Chevrolet, Buick,
Cadillac and GMC.
Steve Rattner, the head of the Obama administration's auto task force,
told reporters earlier this week that GM must adjust to being smaller
and less global.
”It would be natural as part of this overall downsizing of GM for there
to be a change in the management structure to become a bit closer to
the ground, a bit leaner and meaner,” he said Monday.
The U.S. government is expected to provide about $50 billion in aid to
the automaker as it exits bankruptcy and tries to become profitable
even in a depressed world auto sales market. That won't be easy for a
company that has lost more than $80 billion in the past four years.
The cuts will help GM adjust to being a smaller company, but will not
make it successful without forceful leadership to change the culture of
bureaucratic committees making decisions too slowly, said Harlan Platt,
a professor at Northeastern University in Boston who teaches corporate
turnarounds.
GM simply must transform itself into a company that makes cars and
trucks that people would love to own, Platt said.
”That's great,” he said of the cuts. “But if it doesn't end up with
General Motors being transformed, then it's just another step on the
way toward the ultimate demise of General Motors.”
Owning
G.M.
NYTIMES Editorial
June 1, 2009
The government is about to own a controlling stake in one of the
largest car companies in the world, if, as is virtually certain,
General Motors files for bankruptcy protection on Monday. If all goes
according to plan, the American and Canadian governments will own
nearly 75 percent of the company that emerges from the process — and
could end up holding their stake for several years.
President Obama owes American taxpayers and voters a candid and
detailed explanation of the government’s goals and the levers it
intends to use to achieve them. He should make clear that the
overarching objectives are to create a profitable company that makes
cars that people want to buy, and that are more fuel-efficient.
In particular, he should be explicit about how the government will
handle the conflicts between those goals, the administration’s
perception of the public interest and the narrower goals of members of
Congress.
Owning a car company like G.M. is likely to be politically trickier
than it appears at first blush. The administration’s insistence that it
has no intention of getting involved in the day-to-day decisions of
General Motors is a reasonable response to concerns that the vagaries
of the political process could run the company into the ground.
We agree that if taxpayers’ interests as shareholders are to be
protected, G.M. cannot be micromanaged from Washington. Neither the
Treasury nor members of Congress should decide which plants or
dealerships are to be closed, how many workers are to be laid off or
hired, what specific designs G.M. adopts and where it should make them.
If the objective is to turn G.M. into a profitable carmaker as soon as
possible so it can be sold back into private hands, it is a sound
decision to let professionals run the company.
The government would still have the votes to appoint a majority of the
members of the board, and should make certain that its appointees are
dedicated to the big goals of profitability and fuel-efficiency.
Mr. Obama must tell the American people that these, indeed, are the
overriding objectives. The decisions of G.M.’s new managers should not
become entangled with the government’s other policy priorities — such
as maximizing employment in the United States or reducing job losses in
Michigan. And he should specify what is supposed to happen if the goals
of profitability and fuel efficiency collide.
It was only March when the Obama administration let G.M. slide toward
bankruptcy by denying it more taxpayer money, partly on the grounds
that the company was too heavily dependent on S.U.V.’s., while its
biggest stab at fuel economy, the Volt, was too expensive to work in
the near future. Since then, a government task force has been deeply
involved in all sorts of strategic decisions about the structure of the
company’s operations.
It is not unimaginable that the government could have similar qualms
about G.M.’s strategy in the future and may want to intervene again.
The president should tell Americans what to expect if that time comes.
Bankrupt G.M.
Says It Owes $172 Billion
NYTIMES
By DAVID E. SANGER, JEFF ZELENY and BILL VLASIC
This article was reported by David E. Sanger, Jeff Zeleny and Bill
Vlasic, and written by Mr. Sanger.
June
2, 2009
Calling the federal government a reluctance shareholder, President
Obama on Monday characterized the bankruptcy filing of General Motors
as necessary to assure that the company remained a viable part of
America in the years ahead.
President Obama said that the government had agreed to support G.M.’s
reorganization because executives had worked tirelessly to produce a
plan that met his demand for a leaner company focused on fuel-efficient
vehicles.
General Motors filed for bankruptcy on Monday morning, submitting its
reorganization papers to a federal clerk in Lower Manhattan.
The reorganization, Mr. Obama said, “will take a painful toll on many
Americans who have relied on G.M.”
“I will not pretend the hard times are over,” Mr. Obama said, adding
that the plant closings announced by the company would hurt many
workers. But, he added, the reorganization was a “sacrifice” that
America needed to make for the next generation and to assure that the
country would “continue to make things.”
The new G.M., he said, will produce the high quality, fuel efficient
cars of tomorrow.
The bankruptcy of a once-proud auto giant that helped to define the
nation’s car culture and played a part in creating the American middle
class immediately rippled across the country.
Auto workers braced for news about their jobs as G.M. said it would
shutter plants in Michigan, Indiana, Ohio and Delaware, and plants in
Tennessee and elsewhere in Michigan were put on standby. In financial
markets, shares of foreign automakers and Ford surged ahead. And in
Washington, President Obama planned to address G.M.’s bankruptcy in a
speech around noon.
In its bankruptcy petition, G.M. said it had $82.3 billion in assets
and $172.8 billion in debts. Its largest creditors were the Wilmington
Trust Company, representing a group of bondholders holding $22.8
billion in debts, and affiliates of the United Auto Workers union,
representing nearly $20.6 billion in employee obligations.
In a court affidavit, Fritz Henderson, G.M.’s chief executive, said
that bankruptcy and a Treasury-sponsored sale of General Motors’ assets
to a so-called “New G.M.” were the automaker’s only option to move
forward. Failing that, he said, the company faced liquidation.
“There is no other sale, or even other potential purchasers, present or
on the horizon,” Mr. Henderson said. In a bit of good news, G.M. said
Monday that it planned to keep its international headquarters in
downtown Detroit, rather than move to the suburbs. It said it responded
to concerns by city officials fearful of losing the only one of the
Detroit companies to be based in the Motor City.
The company was forced into the filing by President Obama, who is
betting that by temporarily nationalizing the onetime icon of American
capitalism, he can save at least a diminished automaker that is
competitive.
With the filing, G.M. follows its crosstown rival Chrysler in
bankruptcy. And G.M. hopes that it can move as swiftly. Chrysler, which
sought court protection on April 30, could emerge in the next few days.
A bankruptcy judge in New York gave approval on Sunday night for most
of its assets to be acquired by Fiat, a decision that President Obama
hailed on Monday morning.
“Chrysler has a new lease on life,” Mr. Obama said in a statement. “We
said this process would be completed quickly and efficiently, and
that’s exactly what has been accomplished today.”
The bankruptcy of General Motors culminates a remarkable four months of
confrontation between Washington and Detroit that is expected to result
in a drastic downsizing of the company. It also places the government
in uncharted territory as a business owner, as it takes a majority
ownership stake in the company during its restructuring.
The company’s Saturn unit, which G.M. began in 1990 to compete with
foreign-made cars, also filed for bankruptcy on Monday. G.M. has said
it will phase out the Saturn brand by 2012.
G.M.’s Saab unit is already under bankruptcy protection in Sweden. The
German government last week picked Magna International, a Canadian
car-parts maker, to buy G.M.’s Opel unit, which is based in Germany.
Reflecting the government’s extraordinary intervention in industry,
aides say, Mr. Obama plans to tell the nation later Monday morning that
he believes G.M. can be brought back from the brink of insolvency, even
if the company looks almost nothing like the titan of old.
In his remarks on Monday, Mr. Obama spelled out a strategy in which a
shrunken G.M. can make money even if new car sales remain at a sluggish
10 million a year in the United States and even if G.M., once the giant
of the industry, drops below its current 20 percent market share in
this country.
But to get there, American taxpayers will invest an additional $30
billion in the company, atop $20 billion already spent just to keep it
solvent as the company bled cash as quickly as Washington could inject
it. Whether that investment will ever be recovered is still an open
question.
The company will also have to shed 21,000 union workers and close 12 to
20 factories, steps that most analysts thought could never be pushed
through by a Democratic president allied with organized labor.
Forty percent of the company’s 6,000 dealers will close, the workers’
union will be forced to finance half of its $20 billion health care
fund with stock of uncertain value in the restructured G.M..
G.M. will also lose its spot on the Dow Jones industrial average, a
crucial stock-market gauge of 30 blue-chip stocks. The car maker had
been a member of the closely watched stock index since 1925.
In press releases and public statements, General Motors tried to put
the best face possible on its bankruptcy filing.
“We see the path to the future for G.M.,” Ray Young, G.M.’s chief
financial officer, said at a briefing Monday morning. “This is a once
in a lifetime opportunity to get our balance sheet healthy. I feel very
blessed to have this opportunity. It’s a huge responsibility.”
Judge Robert E. Gerber of United States Bankruptcy Court in Manhattan
will oversee the bankruptcy. He was appointed in 2000, and oversaw the
bankruptcy of the cable company, Adelphia.
Before that, he was a partner in the Manhattan firm of Fried, Frank,
Harris, Shriver & Jacobson, which he joined in 1971 after
graduating for Columbia Law School. He specialized in securities and
commercial litigation and, thereafter, bankruptcy litigation and
counseling.
The company’s last steps toward bankruptcy took place over the weekend
as a majority of G.M. bondholders agreed not to challenge the filing in
court and to exchange their debt for stock.
To assist in the restructuring, the automaker is expected to hire the
consulting firm Alix Partners, which has worked on several major
bankruptcies, including those for Enron and Kmart. One of the firm’s
partners, Al Koch, is expected to manage the liquidation of corporate
assets that G.M. will shed during its Chapter 11 restructuring, people
with knowledge of the bankruptcy strategy said.
Mr. Obama is taking several risks under the plan. None may be bigger
than the decision that the United States government will take a 60
percent share of the stock in a new G.M., leaving taxpayers vulnerable
if the overhaul is not successful. (Canada, for its part, is taking a
12 percent stake.)
But he argued on Monday that any alternative to his plan would be
worse, and that a liquidation of G.M. — the only other real option —
would send the unemployment rate soaring over 10 percent and would
radiate damage throughout the economy.
Aware of the hardships the plan will impose on regions across the
country that depend on auto production, the White House is dispatching
a dozen Cabinet members and other officials across four states this
week to reassure residents.
In his comments, the president insisted that once the government sets
up new management and a board, it will remove itself from G.M.’s
day-to-day operations. But even his aides anticipate intense pressure
as the company’s managers are called to testify in Congress and face
questions like why they decided to build new cars in Mexico and South
Korea, rather than in Michigan or the South.
“Congress and many Americans are going to say, if we own it, why can’t
we make these decisions?” one of Mr. Obama’s top economic aides said,
“and it’s going to be a challenge to answer that.”
The White House argued that the government’s role should be limited
primarily to the beginning of the process, but that it should then
recede, becoming a passive investor, one seeking to sell its stake
quickly.
At the same time, Mr. Obama has laid out goals for all the Detroit
automakers that will presumably affect their major strategic decisions.
He has urged them, for example, to build smaller cars with
significantly better fuel efficiency. But under the new principles, the
White House would be discouraged from getting involved in G.M’s
decisions about when and where to build such a car, or how long to keep
producing it if it sells poorly.
Six months ago, even the suggestion of such deep intervention into
G.M.’s operations would have raised huge objections. But by the time
the denouement came, the company seemed almost relieved. Robert Lutz,
G.M.’s vice chairman, said that “for the first time in our history, the
American auto industry has the ear of the administration. Their number
one goal is to make us successful.”
Dollar
Hits New Multimonth Low vs Euro, Pound, Yen
NYTIMES
By THE ASSOCIATED PRESS
May 22, 2009; Filed
at 11:43 a.m. ET
NEW YORK (AP) -- The dollar kept falling Friday, notching fresh
multimonth lows against the euro, pound and yen as a warning that
Britain's debt level may result in its credit rating being cut
ricocheted into worries about the massive U.S. deficit.
The 16-nation euro rose to $1.4015 in morning trading from $1.3889 in
New York late Thursday -- its first time above $1.40 since Jan.
2. The
British pound rose to $1.5916 from $1.5890, peaking at $1.5945 earlier
in the session, its highest point since Nov. 6.
Meanwhile, the dollar edged up to 94.51 Japanese yen from 94.23 yen --
after earlier falling to 93.82, its lowest point since Feb. 23.
On Thursday, Standard & Poor's said Britain may have its rating cut
because of rising debt levels. Though the ratings agency reaffirmed the
country's actual long-term credit rating at ''AAA,'' it said the
outlook had deteriorated because of massive borrowing to deal with the
recession and the banking crisis.
Because Britain is pursuing similar policies to the U.S. -- with both
the Bank of England and the Federal Reserve injecting billions of
dollars in their economies by buying assets from banks -- the move also
weighed on U.S. assets and the dollar. Treasurys sold off Thursday, and
continued to do so Friday. S&P's announcement ''wound up
creating
more problems for the U.S. dollar than for the British pound,'' HSBC
analysts said in a research note.
''The problem for the U.S. is particularly acute because of its reserve
status,'' said UBS analyst Brian Kim in an e-mail to investors Friday.
Major holders of U.S. debt, such as Middle Eastern sovereign funds and
the Chinese government, have not been shy about calling the U.S. out
for what it sees as policies that will trigger inflation, shrinking the
value of their Treasury holdings. The Fed in March said it
planned to
buy up billions in long-term Treasurys and $1.25 trillion in
mortgage-backed securities, flooding the money supply.
''The dollar has weakened as dollar bears have now added concerns on
U.S. credit ratings to their arsenal,'' Kim said.
Earlier this month, the Obama administration hiked its forecast for
this year's federal deficit to $1.84 trillion. The deficit is
approaching $1 trillion for the budget year that began Oct. 1.
Big
deficits mean the government has to borrow more, which could put its
credit rating at risk. They can also put upwards pressure on inflation,
thus cutting the purchasing power of the dollar.
In other trading, the dollar fell to 1.1235 Canadian dollars from
$1.1404 and slid to 1.0833 Swiss francs from 1.0936 francs late
Thursday.
Treasury Said to Plan Second GMAC
Bailout
NYTIMES
By EDMUND L. ANDREWS
May 21, 2009
WASHINGTON — The Treasury Department has decided to bail out GMAC, the
former financing arm of General Motors, with $7.5 billion, according to
people familiar with the discussions, which would bring its total
federal assistance to more than $12 billion.
The deal is expected to close on Thursday and comes two weeks after
federal regulators concluded from a stress test on GMAC that it needed
an additional $11.5 billion in capital to weather a severe downturn in
the economy.
GMAC continues to provide crucial financing for car sales by General
Motors, and Treasury officials recognized that its survival was
essential to the government’s broader attempt to rescue and restructure
the automobile giant, according to the individuals who were briefed on
the discussions and who spoke only on the condition that they not be
identified.
General Motors and Chrysler are both in the midst of arduous efforts to
shrink in size, wring more concessions from labor unions and rethink
their fundamental business strategies.
GMAC received $5 billion in federal bailout money in December.
The company is reeling from the broader credit crisis and the
recession, as well as from its losses from subprime mortgages. During
the housing boom, GMAC acquired a major subprime lender and became one
of the biggest players in that segment of the mortgage industry.
The Federal Reserve allowed it to convert to a bank holding company
last year, a move that allowed it to apply for rescue help from the
Troubled Asset Relief Program, or TARP.

Treasury Plans to Strengthen Regulation of Derivatives, Senator Says
NYTIMES
By THE ASSOCIATED PRESS
Filed at 2:35 p.m. ET
May 13, 2009
WASHINGTON (AP) -- Treasury Secretary Timothy Geithner will announce a
plan on Wednesday to strengthen federal regulations governing
over-the-counter derivatives, a class of financial instruments that
includes the risky contracts that helped bring down AIG.
Sen. Christopher Dodd, a Connecticut Democrat who chairs the Senate
Banking Committee, says he has been told that the administration will
"really tighten down" on them. He said had not been told how and did
not have further details.
Geithner was scheduled to brief reporters at 4 p.m. EDT.
Similar
to previous story...
US to Borrow 46 Cents for Every Dollar Spent
By THE ASSOCIATED PRESS
Filed at 9:11 p.m. ET
May 11, 2009
WASHINGTON (AP) -- The government will have to borrow nearly 50 cents
for every dollar it spends this year, exploding the record federal
deficit past $1.8 trillion under new White House estimates. Budget
office figures released Monday would add $89 billion to the 2009 red
ink -- increasing it to more than four times last year's all-time high
as the government hands out billions more than expected for people who
have lost jobs and takes in less tax revenue from people and companies
making less money.
The unprecedented deficit figures flow from the deep recession, the
Wall Street bailout and the cost of President Barack Obama's economic
stimulus bill -- as well as a seemingly embedded structural imbalance
between what the government spends and what it takes in.
As the economy performs worse than expected, the deficit for the 2010
budget year beginning in October will worsen by $87 billion to $1.3
trillion, the White House says. The deterioration reflects lower tax
revenues //**--and higher costs for bank failures, unemployment
benefits and
food stamps.
Just a few days ago, Obama touted an administration plan to cut $17
billion in wasteful or duplicative programs from the budget next year.
The erosion in the deficit announced Monday is five times the size of
those savings.
For the current year, the government would borrow 46 cents for every
dollar it takes to run the government under the administration's plan.
In 2010, it would borrow 35 cents for every dollar spent.
''The deficits ... are driven in large part by the economic crisis
inherited by this administration,'' budget director Peter Orszag wrote
in a blog entry on Monday.
The developments come as the White House completes the official release
of its $3.6 trillion budget for 2010, adding detail to some of its tax
proposals and ideas for producing health care savings. The White House
budget is a recommendation to Congress that represents Obama's fiscal
and policy vision for the next decade.
Annual deficits would never dip below $500 billion and would total $7.1
trillion over 2010-2019. Even those dismal figures rely on economic
projections that are significantly more optimistic -- just a 1.2
percent decline in gross domestic product this year and a 3.2 percent
growth rate for 2010 -- than those of private sector economists and the
Congressional Budget Office.
As a percentage of the economy, the measure economists say is most
important, the deficit would be 12.9 percent of GDP this year, the
biggest since World War II. It would drop to 8.5 percent of GDP in 2010.
In the past three decades, deficits in the range of 4 percent of GDP
have caused Congress and previous administrations to launch efforts to
narrow the gap. The White House predicts deficits equaling 2.9 percent
of the economy within four years.
Polling data suggest Americans are increasingly worried about mounting
deficits and debt.
An AP-GfK poll last month gave Obama relatively poor grades on the
deficit, with just 49 percent of respondents approving of the
president's handling of the issue and 41 percent disapproving. By
contrast, Obama's overall approval rating was 64 percent, with just 30
percent disapproving.
''Even using their February economic assumptions -- which now appear to
be out of date and overly optimistic -- the administration never puts
us on a stable path,'' said Marc Goldwein of the Committee for a
Responsible Federal Budget, a bipartisan group that advocates budget
discipline. ''The president ... understands the critical importance of
fiscal discipline. Now we need to see some action.''
For the most part, Obama's updated budget tracks the 134-page outline
he submitted to lawmakers in February. His budget remains a bold but
contentious document that proposes higher taxes for the wealthy, a
hotly contested effort to combat global warming and the first steps
toward guaranteed health care for all.
Meanwhile, the congressional budget plan approved last month would not
extend Obama's signature $400 tax credit for most workers -- $800 for
couples -- after it expires at the end of next year.
Obama's ''cap-and-trade'' proposal to curb heat-trapping greenhouse gas
emissions is also reeling from opposition from Democrats from
coal-producing regions and states with concentrations of heavy
industry. Under cap-and-trade, the government would auction permits to
emit heat-trapping gases, with the costs being passed on to consumers
via higher gasoline and electric bills.
Also new in Obama's budget details are several tax ''loophole''
closures and increased IRS tax compliance efforts to raise $58 billion
over the next decade to help finance his health care measure. The money
would make up for revenue losses stemming from lower-than-hoped
estimates for his proposal to limit wealthier people's ability to
maximize their itemized deductions.
White House:
Budget Deficit to Top $1.8 Trillion
NYTIMES
By THE ASSOCIATED PRESS
Filed at 11:21 a.m. ET
May 11, 2009
WASHINGTON (AP) -- With the economy performing worse than hoped,
revised White House figures point to deepening budget deficits, with
the government borrowing almost 50 cents for every dollar it spends
this year.
The deficit for the current budget year will rise by $89 billion to
above $1.8 trillion -- about four times the record set just last year.
The unprecedented red ink flows from the deep recession, the Wall
Street bailout, the cost of President Barack Obama's economic stimulus
bill, as well as a structural imbalance between what the government
spends and what it takes in.
As the economy performs worse than expected, the deficit for the 2010
budget year beginning in October will worsen by $87 billion to $1.3
trillion, the White House says. The deterioration reflects lower tax
revenues and higher costs for bank failures, unemployment benefits and
food stamps.
For the current year, the government would borrow 46 cents for every
dollar it takes to run the government under the administration's plan.
In one of the few positive signs, the actual 2009 deficit is likely to
be $250 billion less than predicted because Congress is unlikely to
provide another $250 billion in financial bailout money.
The developments come as the White House completes the official release
of its $3.6 trillion budget for 2010, adding detail to some of its tax
proposals and ideas for producing health care savings. The White House
budget is a recommendation to Congress that represents Obama's fiscal
and policy vision for the next decade.
Annual deficits would never dip below $500 billion and would total $7.1
trillion over 2010-2019. Even those dismal figures rely on economic
projections that are significantly more optimistic -- just a 1.2
percent decline in gross domestic product this year and a 3.2 percent
growth rate for 2010 -- than those forecast by private sector
economists and the Congressional Budget Office.
For the most part, Obama's updated budget tracks the 134-page outline
he submitted to lawmakers in February. His budget remains a bold but
contentious document that proposes higher taxes for the wealthy, a
hotly contested effort to combat global warming and the first steps
toward guaranteed health care for all.
Obama's Democratic allies controlling Congress have already made it
clear that they will reject key elements of his plan. Already
apparently dead is a plan to raise $267 billion over the next decade to
pay for his health care initiative by curbing the ability of wealthier
people to reduce their tax bills through deductions for mortgage
interest, charitable contributions and state and local taxes.
And the congressional budget plan approved last month would not extend
Obama's signature $400 tax credit for most workers -- $800 for couples
-- after it expires at the end of next year.
Obama's remarkably controversial ''cap-and-trade'' proposal to curb
heat-trapping greenhouse gas emissions is also reeling from opposition
from Capitol Hill Democrats from coal-producing regions and states with
concentrations of heavy industry. Under cap-and-trade, the government
would auction permits to emit heat-trapping gases, with the costs being
passed on to consumers via higher gasoline and electric bills.
Among the new proposals is a plan -- already on its way through
Congress -- that would increase the Federal Deposit Insurance
Corporation's borrowing authority from $30 billion to $100 billion in
order to grant a two-year reprieve from higher deposit insurance
premiums while the industry is struggling.
Also new are several tax ''loophole'' closures and increased IRS tax
compliance efforts to raise $58 billion over the next decade to help
finance Obama's health care measure. The money makes up for revenue
losses stemming from lower-than-hoped estimates of his proposal to
limit wealthier people's ability to maximize their itemized deductions.
The updated budget also would repeal an unintended tax windfall taken
by paper companies that use a byproduct in the paper-making process as
fuel to power their mills. The tax credits were never intended for
paper companies, but now they could be worth more than $3 billion a
year, according to a congressional estimate.
The budget would make permanent the expanded $2,500 tax credit for
college expenses that was provided for two years in the just-passed
economic stimulus bill. It also would renew most of the Bush tax cuts
enacted in 2001 and 2003, and would permanently update the alternative
minimum tax so that it would hit fewer middle- to upper-income
taxpayers.
BANKRUPTCY: What lies
ahead for Chrysler, GM
DAY
By Stephen Manning
Published
on 5/29/2009
Washington - First it was
Chrysler. Now General Motors looks like it's headed for bankruptcy
court.
The nation's largest
automaker is expected to file for Chapter 11 bankruptcy protection
within days as part of a new government plan to create a leaner GM and
erase the company's unsecured debt. Chrysler, meanwhile, is hoping to
emerge soon from its own reorganization in bankruptcy court.
The automakers, two of America's
most iconic companies, need court protection to cut debt and revamp
operations free of creditors' clutches. That way, they hope, they'll
emerge more competitive once the economy rebounds.
So what should you expect from a GM
reorganization in bankruptcy court? Will it be different from
Chrysler's? Does one company's case provide a roadmap to what might
happen to the other?
Here are some questions and answers
about Chrysler, GM and bankruptcy court:
Q: What are the
two companies hoping to get out of reorganizing in bankruptcy court?
A: In short, a new life.
Keeping both companies alive is
considered a top priority by the federal government since hundreds of
thousands of jobs depend on the U.S. auto industry. So the federal
government, which is loaning billions to both companies, hopes that a
court-approved reorganization can keep Chrysler and GM from bleeding
money and eventually remake them as strong players in the world auto
market.
Q: How would a GM
bankruptcy reorganization be different from Chrysler's?
A: The major difference is size.
As the nation's largest automaker,
GM would be one of the nation's biggest bankruptcy protection filings
ever. GM made twice as many autos as Chrysler did last year (3 million
versus 1.5 million), employs 235,000 people compared with Chrysler's
54,000, and has plants and operations in many more countries.
GM, which sells GMC vans, Buicks,
Chevrolets, Pontiacs and Cadillacs, also has far more brands than
Chrysler, which sells under the Jeep, Dodge and Chrysler brand names.
(Though GM has said it plans to eliminate the Pontiac brand.)
Q:
So what is the significance of GM's size in a bankruptcy case?
A: It
means unraveling GM will be much more complicated than reorganizing
Chrysler.
GM operates worldwide, selling cars
in 140 countries and owning overseas brands like the Sweden's Saab,
Britain's Vauxhall and Germany's Opel.
Separate deals will likely have to
be struck to resolve issues related to GM's overseas holdings, and the
German government is already trying to shield Opel and its 25,000
workers from a possible GM bankruptcy. GM will also likely have to
navigate the bankruptcy law of the countries where it has plants and
other facilities as it works to restructure.
A clear illustration of the
difference in scale between GM and Chrysler is how much money will be
spent on lawyers, consultants and others who will work on the two
cases. Lynn LoPucki, a UCLA law school professor who has studied fees
from 102 large public bankruptcies, estimates that fees in the Chrysler
case will reach around $573 million. That's a huge sum, but consider
the estimate for GM: $1.9 billion.
Q: How will these
cases play out?
A: Both companies owe a lot of money
and have received about $25 billion in government loans. The bankruptcy
court will determine how the creditors get paid and in what order.
For Chrysler, that means figuring
out how to deal with $6.9 billion in debt. For GM, it's trickier. On
Wednesday, GM failed to persuade holders of $27 billion in bonds - GM
debt - to exchange them for a 10 percent equity stake. (In other words,
ownership of a portion of GM.) The idea was that this would have
improved the company's health by reducing its debt.
The U.S. Treasury came back with a
plan to sweeten the deal Thursday. Whether or not the bondholders
accept it, though, it's still a near certainty that GM will need to
file for bankruptcy protection.
It will also be up to the courts to
approve the automakers' restructuring plans. Chrysler seeks an alliance
with the Italian automaker Fiat and big ownership stakes for the United
Auto Workers union and the federal government. GM has proposed handing
over ownership to the UAW and its debt holders, along with a whopping
70 percent share to the federal government.
Other parties also have a stake in
the cases, including the auto parts suppliers who may be owed money,
the network of dealers that rely on the automakers for their stock, and
employees and retirees worried about their jobs and preserving their
benefits.
Q: With Chrysler
going first, does it provide a blueprint for GM?
A: It does in some ways. Chrysler
hopes to zip through its case in just 30 days, near light speed for a
bankruptcy case. If that works out, GM may look to try to do the same
so that it can exit bankruptcy quickly. The Obama administration thinks
GM can finish its case in between 60 to 90 days.
GM may look to the Chrysler case to
figure out what court to file in. Chrysler has made rapid progress in a
New York federal bankruptcy court, and could be finished within the
next several weeks. If the case continues to go well, GM may file
there, LoPucki said. If it doesn't, GM could go elsewhere, like
Wilmington, Del. _ a jurisdiction that's known for handling big
corporate bankruptcies.
One reason the Chrysler case has
gone so smoothly is that there is already another company, Fiat, lined
up to help it recover. In GM's case, there isn't such a deal. Some
experts think the GM case will move more slowly as a result.
Q: What does
bankruptcy mean for me if I own a GM or Chrysler or if am thinking
about buying one?
A: Even though the companies face
some big legal hurdles, you probably won't notice it much. Both are
still selling cars, though they have announced plans to sharply cut
back on the number of dealers they work with. And the U.S. government
has pledged to back the warranties from both companies to reassure
buyers.
May
Day, May Day...
Chrysler
Bankruptcy Plan Is Announced
NYTIMES
By MICHELINE MAYNARD
May 1, 2009
DETROIT — Chrysler, the third-largest American auto company, will seek
bankruptcy protection and enter an alliance with the Italian automaker
Fiat, the White House announced Thursday.
The bankruptcy case, which officials envisioned as a swift, “surgical”
process, was set to be filed in United States Bankruptcy Court in New
York. It marks the first time a major American car company has tried to
restructure under bankruptcy protection since Studebaker in 1933.
“I have every confidence that Chrysler will emerge from this process
stronger and more competitive,” President Obama said during a noontime
appearance at the White House.
The president emphasized the speed with which the administration
expects the bankruptcy process to be completed, saying that it would be
“quick, official and controlled” and that the lives of those who work
at Chrysler or live in communities where the company has its operations
would not be disrupted.
Mr. Obama said the partnership with Fiat “will give Chrysler not only a
chance to survive but to thrive in the global auto industry.” He said
it was made possibly by the series of sacrifices by Chrysler
stakeholders, such as the United Automobile Workers union, and said
more sacrifices were in store.
But the president was pointedly critical of investment funds that
rejected the government’s settlement offer, saying they hoped to
benefit from the sacrifices of others while making none of their own.
“I don’t stand with them,” he said in a stern tone.
A senior White House official said that the bankruptcy case would begin
immediately, and that the government would provide debtor-in-possession
financing in a range of $3 billion to $3.5 billion, so the company can
continue to operate normally.
Once Chrysler restructures, the company would receive $4.5 billion in
financing to restart its operations, for total American government
support through the bankruptcy process and afterwards of up to $8
billion.
That is $2 billion more than Mr. Obama initially said the company would
receive if it successfully reached a deal with Fiat.
Chrysler has already received $4.5 billion from the government, under a
bailout plan put into effect by the Bush administration in late
December, after Congress rejected legislation that would have provided
federal aid.
The Canadian government also is expected to provide $1 for every $3 in
American support, the official said, meaning Chrysler could receive
another $2.6 billion.
Government officials estimated that the case could be as short as 30 to
60 days, although bankruptcy cases normally take much longer. The end
result would be a new version of Chrysler that would emerge from
bankruptcy without liabilities, such as debt and legal obligations,
faced by the company now.
At the same time, Chrysler and Fiat signed an agreement that calls for
Fiat to take part in running Chrysler. The Italian automaker will
provide technical operations, and build at least one vehicle in a
Chrysler plant. Fiat did not put up any financing as part of the
agreement.
A new board will be appointed to run Chrysler that is expected to
include representatives from both companies and the U.A.W. Chrysler’s
chief executive, Robert L. Nardelli, is expected to leave the carmaker.
The bankruptcy filing could serve as a preview of what a filing by
General Motors might look like. G.M., which like Chrysler received
federal assistance last year, faces a June 1 deadline for its own
restructuring.
President Obama had set a Thursday deadline for Chrysler to conclude a
deal with Fiat, and to resolve issues with the United Automobile
Workers union and its creditors.
On Wednesday, union members approved contract changes with Chrysler
that will mean pay and benefit cuts, and their contract is expected to
remain in effect during the bankruptcy. “No judge is going to override
that kind of support,” the administration official said.
But Chrysler and the Treasury were unable to reach agreements with all
the holders of $6.9 billion in company bonds. A number of investment
funds balked at a government offer to pay $2.25 billion in cash for the
debt, an offer that was sweetened after four major banks agreed to an
earlier offer of $2 billion.
White House officials said the failure to reach agreement with lenders
was the reason why President Obama decided Chrysler should go through
the bankruptcy process.
However, dealing with the leaner Chrysler will also benefit Fiat.
White House officials said some of Chrysler’s 3,600 dealers in the
United States are expected to close, and Chrysler Financial, the
company’s lending arm, will cease providing loans for new Chrysler cars
and trucks. Instead, GMAC, the financing arm partially owned by General
Motors, will take over lending to Chrysler dealers.
The administration said it did not expect significant white or
blue-collar job cuts as a result of the bankruptcy. Chrysler suppliers
also can expect their contracts will be honored, although the company
would have the right under bankruptcy protection to cancel them.
Last-minute efforts by the Treasury Department to win over resistant
Chrysler debtholders failed Wednesday night, and the administration’s
frustration was evident in President Obama’s remarks. .
But a group of Chrysler’s secured lenders asserted that the
administration was skirting bankruptcy laws by forcing them to take a
larger loss on their debt than other stakeholders in the company. They
said their proposals to restructure Chrysler had been ignored by the
government.
“The fact is, in this process and in its earnest effort to ensure the
survival of Chrysler and the well-being of the company’s employees, the
government has risked overturning the rule of law and practices that
have governed our world-leading bankruptcy code for decades,” the
group, which calls itself the Committee of Non-TARP Lenders, said in a
statement.
Members of the committee include units of Oppenheimer Funds, Perella
Weinberg Partners’ Xerion Capital Fund and Stairway Capital Management.
The funds emphasized that their investors are major pension funds,
teachers’ unions and school endowments.
The lenders said they have been forced to negotiate through a group of
big banks that have accepted government bailout money and are reticent
to push back against the government’s proposal. They are particularly
upset that the United Auto Workers will receive more for their debt
even though the secured lenders should legally be paid before the union.
Many of the holdout lenders, primarily distressed-debt hedge funds who
bought portions of Chrysler’s $6.9 billion of bank debt at a discount,
are likely to argue that they have the first claim to the carmaker’s
assets that were pledged for those loans, according to people briefed
on the matter.
They argue that they would see greater recovery in a liquidation of the
car giant, which they contend would yield about 65 cents on the dollar.
The most recent plan proposed Wednesday by the Treasury Department and
Chrysler’s four main bank lenders — JPMorgan Chase, Citigroup, Morgan
Stanley and Goldman Sachs — would have given the creditors about 33
cents on the dollar.
The four big banks own 70 percent of Chrysler’s secured debt.
As the talks with Fiat and the lenders entered the final hours, members
of the United Automobile Workers union approved a historic deal in
which the union would take a 55 percent stake in Chrysler. The stake
would finance half of a new trust to administer retiree health care
costs.
Deal to Sell Saturn to Penske Reported
NYTIMES
By MICHAEL J. de la MERCED and MICHELINE MAYNARD
June
6, 2009
General Motors has agreed to sell its Saturn brand to Roger Penske, a
major auto dealer, and a deal is expected to be announced on Friday, a
person with direct knowledge of the matter said.
The move is the latest by G.M. to sell off assets as it reorganizes
itself in bankruptcy. Saturn, which was part of G.M.’s bankruptcy
filing on Monday, had drawn 16 bidders over a months-long sales
process, G.M. said earlier this week.
Under the terms of the deal, Mr. Penske, a former race car driver whose
Penske Automotive Group is one of the largest dealerships in the
country, will initially buy Saturn vehicles from G.M. But he is
expected to eventually buy cars from other carmakers like Renault,
through its Samsung Motors Unit in Korea.
Mr. Penske’s company, which owns 310 franchises around the world,
already serves as the sole distributor of Daimler’s Smart line of small
cars.
G.M. is seeking to use bankruptcy to pare itself down to a core group
of brands, like Chevrolet and Cadillac, while shutting down or selling
off others. Earlier this week, it agreed to sell its Hummer brand to a
Chinese heavy machinery company and a stake in its Opel subsidiary to
Canada’s Magna International.
G.M. announced months ago that it was seeking to divest Saturn, a
25-year-old subsidiary that initially focused on fuel-efficient cars to
rival those of foreign carmakers. Saturn cost G.M. about $5 billion in
the late 1980s, including factory and development costs for its small
cars.
But the unit’s sales peaked at 286,000, and both G.M. and the United
Auto Workers union soured on its management style. The U.A.W. proposed
a spinoff of Saturn in the late 1990s, but G.M.’s board refused to
consider the move.
To help sell the brand, G.M. turned to Steve Girsky, an auto analyst
and adviser to the U.A.W.
As Detroit Is
Remade, the U.A.W. Stands to Gain
NYTIMES
By MICHELINE MAYNARD and NICK BUNKLEY
April 30, 2009
DETROIT — In the devastating slump that has forced two
of Detroit’s automakers to the brink of bankruptcy, the United
Automobile Workers union stands to become one of the industry’s few
winners.
According to restructuring plans proposed this week, the union will
have more than half the stock in Chrysler and a third of General
Motors, meaning it will have tremendous influence, with the government,
in determining the future of the companies. The United Automobile
Workers union said Wednesday that its members ratified a cost-cutting
deal with Chrysler by a 4-to-1 margin.
“Our members have responded by accepting an agreement that is painful
for our active and retired workers, but which helps preserve U.S.
manufacturing jobs and gives Chrysler a chance to survive,” Ron
Gettelfinger, the union’s president, said in a statement.
The prospect of a big ownership stake for the U.A.W. in G.M. has
angered holders of billions of dollars in bonds, who stand to get only
a fraction of the restructured company. As for Chrysler, the banks,
hedge funds and others that lent it money have been promised only cash,
not stock.
“We believe the offer to be a blatant disregard of fairness for the
bondholders who have funded this company and amounts to using taxpayer
money to show political favoritism of one creditor over another,” a
group of G.M. bondholders said in a statement this week.
The U.A.W. members at both automakers stand to lose some of their pay
and benefits, but the cuts are not as deep as those faced by airline
and steel workers when their companies went bankrupt. Under proposed
deals devised by the Treasury Department, U.A.W. pensions and retiree
health care benefits would largely be protected. The U.A.W. has
derived its leverage in part from the support of a Democratic president
and Congress. But it also results from a long-term strategy to build
support in Washington that stretches back more than 60 years.
“We have to fight both in the economic and political fields, because
what you win on the picket lines, they take away in Washington if you
don’t fight on that front,” Walter P. Reuther, the union’s best known
president, said in 1947.
Mr. Reuther and every succeeding U.A.W. president invested significant
amounts of time and money to pursue that goal. In the last 20
years, the U.A.W. has donated more than $25.4 million to federal
candidates, 99 percent of it to Democrats, according to
OpenSecrets.org, a site that tracks campaign contributions.
The union ranks No. 16 on the group’s list of top 100 political donors,
known as “heavy hitters.” The U.A.W. was well ahead of G.M., which gave
$10 million in that period, ranking it 73rd. Chrysler and Ford Motor
did not make the list.
Mr. Gettelfinger, the current president, has also been an effective,
steel-nerved leader, and has managed to maintain the union’s importance
in recent negotiations, even though the U.A.W. has lost nearly 200,000
members since he took office in 2003. Mr. Gettelfinger’s
influence stems in part from the fact that the U.A.W. represents nearly
all the auto workers at the Detroit companies. (Workers at a few plants
are represented by the I.U.E.) By contrast, airline workers are
represented by multiple unions.
“The U.A.W. is so overwhelmingly dominant,” said Duane Woerth, former
president of the Air Line Pilots Association. “You’re only talking to
one union and that gives them more power.”
Mr. Woerth, whose union was involved in 22 bankruptcy cases involving
big and small airlines during his tenure as its president, said the
pressure that bondholders and other investors might put on the U.A.W.
has been mitigated by Democrats’ support. For example, the union
has yet to complete a deal with G.M., which laid out an offer to its
bondholders this week that would pay them about 41 cents on the dollar.
In order for the deal to succeed, 90 percent must accept it, which
analysts say is unlikely given bondholders’ criticism of the offer.
Only this week did the U.A.W. come to terms at Chrysler, facing a
Thursday deadline set by the administration. The tactics have won
admiration from others in the labor movement, even those forced to
grant concessions to bankrupt companies.
Robert Roach Jr., a general vice president of the International
Association of Machinists and Aerospace Workers, said a successful
outcome for the U.A.W. and the auto companies would benefit the
economy, and in the process help his 650,000 members at major airlines,
aircraft makers and other companies.
“We’re all in this,” Mr. Roach said. “The corporations, the federal
government, the taxpayer, the cities and the states. If we are able to
save these auto companies, that will be good for everybody.”
But many of the U.A.W. members who voted Wednesday on the Chrysler
proposal were struggling to see the benefits of the cuts they were
agreeing to. The deal suspends cost-of-living pay increases,
limits overtime pay and reduces paid time off. It also eliminates
dental and vision benefits for retirees.
It also provides
for Fiat to begin building cars in at least one Chrysler plant.
“Either you vote for it or it’s bankruptcy,” said Bruce Clary, 58, who
was an electrician at a Detroit engine plant until being laid off in
January. “And it may be bankruptcy anyway.”
At Chrysler’s Jefferson North assembly plant nearby, the oldest auto
plant still operating in Detroit, workers said the consequences of
rejecting the deal would be far worse than the concessions that it
would force.
“This was the best deal we could get,” said John Davis, who has worked
at Chrysler for 33 years. “We did our part, and now the banks need to
do their part.”
More
"The
Donald" behavior by White House?
Op-Ed Contributor: One Roadblock Too Many for G.M.
NYTIMES
By WILLIAM J. HOLSTEIN
March 31, 2009
PRESIDENT OBAMA’S stunning decision to demand that Rick Wagoner resign
as chairman and chief executive of General Motors was based on the
wrong set of premises and raises the prospect that the administration
will intervene too deeply in the automaker, seriously jeopardizing a
transformation effort that has come a long way in the right direction.
Mr. Obama cited a “failure of leadership” as a reason for forcing out
Mr. Wagoner. While not every decision Mr. Wagoner has made was wise,
over all he had been putting G.M. through a wrenching restructuring
that tried to undo decades of management acquiescence to the United
Auto Workers.
Mr. Obama indicated he did not believe G.M. had moved fast enough in
facing up to global competition. But the company is coming close to
achieving the cost structure of Toyota’s assembly plant in Georgetown,
Ky. — largely because Mr. Wagoner and his team stripped thousands of
dollars out of the cost of every vehicle. Fully one-half of the
company’s unionized work force has been laid off or taken buyout
packages, and the U.A.W. has agreed to a two-tier wage system in which
new workers make only $15 an hour. Just a few years ago that would have
been unimaginable.
Mr. Wagoner also encouraged G.M.’s adoption of Toyota’s lean
manufacturing techniques and quality control. So much so that Buick
tied with Jaguar for first place in the latest J. D. Power ranking of
dependability, coming in ahead of Toyota and its Lexus brand.
By bringing in the auto industry veteran Robert Lutz as vice chairman
for global product development, Mr. Wagoner was also responsible for a
redesigned lineup of vehicles. The Cadillac CTS and Chevrolet Malibu
both won car-of-the-year awards last year and the newly revived Camaro
— which is hitting the roads just as Mr. Wagoner is being ousted —
represents the high-water mark of revitalized American car design.
Mr. Wagoner also pushed the development of the lithium-ion battery that
will power the Chevrolet Volt extended-range electric car when it
appears in late 2010. Lithium-ion batteries represent a leapfrog over
the nickel-metal-hydride batteries in the Toyota Prius. By investing $1
billion in lithium technology, Mr. Wagoner created the best opportunity
for America to win a piece of a huge new “green” industry now dominated
by non-American companies.
Mr. Obama has not only failed to understand these contributions, he has
also deprived G.M. of Mr. Wagoner’s presence on the board. Much of Mr.
Wagoner’s knowledge and experience could simply be lost. With Mr. Lutz
also about to retire, the two executives most responsible for G.M.’s
transformation are gone.
Mr. Obama decided that G.M.’s president, Frederick Henderson, should
move up to take the chief executive’s job, which has been part of
G.M.’s succession plan all along. But how does that represent fresh
leadership? And is Mr. Henderson ready? He is known for being more
aggressive in his business dealings than Mr. Wagoner was, and speaks
the language of Wall Street. That may be useful in dealing with G.M.’s
bondholders and the U.A.W. But Mr. Henderson does not yet command the
loyalty inside the company that Mr. Wagoner did.
The long-term plan had been for him to serve as Mr. Wagoner’s
lieutenant for a year or two more so he could build relationships with
other top executives. Instead, he’s been handed a company that is
reeling over how the Obama administration helped turn Mr. Wagoner into
a scapegoat through its leaks to the news media.
Mr. Obama’s intervention does not stop there. His aides were quoted as
saying they are going to remake the entire G.M. board. But deciding
which director should go and which director should be added is far
beyond the competence of any government. A new board may be the smart
move in the case of a failed bank, where there are thousands of
qualified and experienced financial executives to step in, but as one
of the world’s largest manufacturers, G.M. faces vastly more
complicated and specialized issues.
Mr. Obama also failed to end the bankruptcy talk that has hung over
G.M. and hurt its sales. In his statement on Monday he admitted that “I
know that when people even hear the word ‘bankruptcy’ it can be a bit
unsettling.” He’s right — and that’s exactly why he shouldn’t have said
it was a possibility. Rather, the president should have forcefully
stated that he would keep G.M. out of Chapter 11 because the nation’s
bankruptcy system may not be able to handle such large-scale industrial
restructurings. To wit: Delphi, G.M.’s largest parts supplier, went
into Chapter 11 bankruptcy in 2005 and has yet to emerge.
Add it all up and Mr. Henderson is taking over an organization in a
state of shock. He will have to prove himself to all G.M.’s
constituencies, but he could be distracted by a major shakeup of his
board. Plus, the Damocles sword of bankruptcy will hang over his head.
It is a supremely difficult situation, and may make it even more
difficult for G.M. to sustain its transformation.
It may have been politically expedient for Mr. Obama to give Mr.
Wagoner the pink slip. But politics in Washington have real world
consequences. Before he goes too far, Mr. Obama should recognize the
huge distance that G.M. has traveled and strike the right balance in
respecting the role of the private sector. Unlike the insurance giant
A.I.G. or Wall Street’s failed banks, General Motors consists of real
factories where real people make real things. As it looks to
micromanage an entire industry, let’s hope the administration doesn’t
lose sight of the human side of things.
Much Bigger Deficits
Seen in Budget Office Forecast
NYTIMES
By DAVID STOUT
March 21, 2009
WASHINGTON — President Obama’s budget proposals, if carried out, would
produce a staggering $9.3 trillion in total deficits over the next
decade, much more than the White House has predicted, the Congressional
Budget Office said on Friday.
The office’s estimates of deficits in the fiscal years 2010 through
2019 “exceed those anticipated by the administration by $2.3 trillion.”
The deficits under the Obama plan would be $4.9 trillion more than the
projected deficits if there were no changes in current laws and
policies — what the nonpartisan budget office calls its baseline
assumption.
The startling new figures have enormous implications, political as well
as fiscal. They are certain to bring new expressions of alarm and
dismay from deficit hawks on Capitol Hill, where the president’s $3.6
trillion budget proposal for the next fiscal year, which begins in
October, has already stirred debate.
President Obama’s budget director, Peter R. Orszag, conceded in a news
briefing on Friday that annual deficits of 4 to 5 percent of gross
domestic product, as envisioned in the office’s report, are “ultimately
not sustainable.”
But Mr. Orszag insisted that administration officials “remain
confident” in what he called “the four key principles” of the
president’s budget outline: health care reform, improvements in
education, energy efficiency, and reducing the annual deficit in half
by the end of the president’s first term from the extraordinary levels
it has suddenly reached because of the bailout and stimulus spending
this year.
Mr. Orszag said he was confident that those goals will all be
accomplished in whatever budget resolution emerges after negotiations
with Congress. Asked about recent statements by Senator Kent Conrad,
the North Dakota Democrat who heads the Budget Committee, that the
president’s spending plans might have to be adjusted downward, Mr.
Orszag said it was always assumed that there would be negotiations.
“It’s not like the process would have them just Xerox and vote on it,”
he said.
As for the differences among various budget projections, Mr. Orszag
attributed them in part to small percentages — such as divergent
assumptions about the rate of economic growth — that, when applied to
huge numbers, can produce eye-popping contrasts.
The new estimates will reignite the debate over whether the president’s
spending plans are far too ambitious, given the state of the economy,
or just what is needed to address systemic problems.
Senator Charles E. Grassley, Republican of Iowa and ranking minority
member on the Finance Committee, as well as a senior member on the
Budget panel, said Congress and the White House need to get the message
that the new figures embody.
“People can afford only so much government spending, even for the
worthiest-sounding causes,” he said in a statement.
The deficit is the year-by-year gap between what the government spends
and the revenue it takes in. So even if annual deficits are cut, the
overall national debt will continue to grow so long as there is no
surplus. The debt now stands at around $11 trillion, with about $6.5
trillion owed to individuals, corporations and governments and other
lenders, foreign or domestic, while about $4.3 trillion is owed to the
funds for Social Security benefits, military and civil service pensions
and other government programs.
Read
about China, here.
Summers: 'Excess of Fear' Must Be Broken (as in "we, the people,
are not broke" - just the financial system)
NYTIMES
By THE ASSOCIATED PRESS
Filed at 11:04 a.m. ET
March 13, 2009
WASHINGTON (AP) -- President Barack Obama's top economic adviser says
the crisis in the financial sector has led to an ''excess of fear''
that must be broken to reverse the economic downturn.
Lawrence Summers, the president's director of the National Economic
Council, told a think tank gathering Friday that ''fear begets fear''
and that ''is the paradox at the heart of the financial crisis.''
He said an abundance of greed and an absence of fear precipitated the
excesses that led to the meltdown that froze credit.
Summers said it was ''modestly encouraging'' that consumer spending
appears to have stabilized after collapsing during the holiday season.
He spoke at the Brookings Institution.
THIS IS A BREAKING NEWS UPDATE. Check back soon for further
information. AP's earlier story is below.
WASHINGTON (AP) -- President Barack Obama is embracing a mantle of
confidence-builder in chief. Whether he is meeting with his own
economic advisers or worried business leaders, his message is meant to
be calm and reassuring -- even in the wake of more bad economic news.
Obama will have another opportunity to assert his optimism after he
meets Friday with Paul Volcker, the former Federal Reserve chairman who
now guides the president's economic recovery advisory board. Volcker
was preparing to brief Obama and his economic team on how the $787
billion stimulus package is working.
Speaking to a gathering of the nation's CEOs on Thursday, Obama
defended his plans for pulling the economy out of a downward spiral,
saying that his long-term view gives him reason to maintain optimism
despite an uptick in unemployment and falling economic indicators.
''I've never bought into these Malthusian, woe, Chicken Little, the
earth is falling. I tend to be pretty optimistic,'' said Obama, once a
long-shot candidate for the White House. ''I wouldn't be here if I
weren't pretty optimistic.''
The president boldly declared that the national crisis is ''not as bad
as we think'' and that he has seen public opinion seesaw without logic.
''A smidgen of good news and suddenly everything is doing great. A
little bit of bad news and 'Ooohh, we're down on the dumps,''' he said.
''And I am obviously an object of this constantly varying assessment.''
Obama disagreed with the choices.
''I don't think things are ever as good as they say, or ever as bad as
they say,'' he added. ''Things two years ago were not as good as we
thought because there were a lot of underlying weaknesses in the
economy. They're not as bad as we think they are now.''
In Congress, Obama's budget plans were meeting resistance.
Sen. Kent Conrad, chairman of the Senate Budget Committee, called the
track of future deficits ''unsustainable'' and singled out Obama's
proposal for adding $634 billion in health care spending over the next
10 years.
''Some of us have a real pause about the notion of putting
substantially more money into the health care system when we've already
got a bloated system,'' said Conrad, D-N.D.
Richard Parsons, chairman of beleaguered Citigroup Inc., asked if Obama
could offer some help in a national battle ''between confidence and
fear.''
It was a similar question facing Obama's treasury secretary, Timothy
Geithner, before Conrad's committee. Geithner encountered blunt
questions about the administration's plans for shoring up the nation's
banks. He reiterated the administration's goal to lay out a
private-public partnership to make up to $1 trillion in financing
available to help banks clear their books of toxic, mortgage-related
assets that have led to a national credit freeze.
Geithner hinted more money might be required beyond the existing $700
billion financial rescue fund: ''We certainly can start with the
resources we have.''
But Obama, to business leaders, said not all was lost.
''For all the, you know, angst that's been out there, you've got
banking institutions that are still functioning and, lo and behold,
making profits,'' Obama said.
Meanwhile, House Speaker Nancy Pelosi, D-Calif., played down talk that
Democrats would consider a second economic stimulus bill.
The flurry of comments illustrated the complicated moving parts
confronting Washington as the economy continues to decline, credit
remains clogged and a new president advances broad and expensive
initiatives. The money set aside to address those needs so far has been
staggering -- $787 billion for an economic stimulus designed to save
and create jobs, the $700 billion approved by Congress for the
financial rescue package and hundreds of billions more through programs
from the Federal Reserve Bank.
On top of that, Obama wants to overhaul health care, reduce
greenhouse-gas pollution and undertake major changes in energy policy.
He's projecting a federal deficit of $1.75 trillion this year, by far
the largest in history, but says he can get it down to $533 billion by
2013.
''I am not choosing to address these additional challenges just because
I feel like it, or because I'm a glutton for punishment,'' Obama told
the Business Roundtable, a group of top business executives. ''I am
doing so because they are fundamental to our economic growth and to
ensuring that we don't have more crises like this in the future.''
A Rising Dollar
Lifts the U.S. but Adds to the Crisis Abroad
NYTIMES
By PETER S. GOODMAN
March 9, 2009
As the world is seized with anxiety in the face of a spreading
financial crisis, the one place having a considerably easier time
attracting money is, perversely enough, the same place that started
much of the trouble: the United States.
American investors are ditching foreign ventures and bringing their
dollars home, entrusting them to the supposed bedrock safety of United
States government bonds. And China continues to buy staggering
quantities of American debt.
These actions are lifting the value of the dollar and providing the
Obama administration with a crucial infusion of financing as it directs
trillions of dollars toward rescuing banks and stimulating the economy,
enabling the government to pay for these efforts without lifting
interest rates.
And yet in a global economy crippled by a lack of confidence and
capital, with lending and investment mechanisms dysfunctional from
Milan to Manila, the tilt of money toward the United States appears to
be exacerbating the crisis elsewhere.
The pursuit of capital suddenly seems like a zero sum game. A dollar
invested by foreign central banks and investors in American government
bonds is a dollar that is not available to Eastern European countries
desperately seeking to refinance debt. It is a dollar that cannot reach
Africa, where many countries are struggling with the loss of aid and
foreign investment.
“Virtually all of the low-income countries are in very serious
trouble,” said Eswar Prasad, a former official at the International
Monetary Fund and a senior fellow at the Brookings Institution, the
liberal-leaning research organization in Washington.
He went on: “This is the third wave of the financial crisis. Low-income
countries are getting hit very hard. The flow of private capital to the
emerging market has dried up.”
Private money invested in so-called emerging countries plunged from
$928 billion in 2007 to $466 billion last year and is likely to fall to
$165 billion this year, according to the Institute of International
Finance.
Not that the United States is enjoying a great influx of money.
Globally, investors are holding tight to cash and extracting it as
quickly as they can from risky ventures.
In the United States, investments by foreigners have slowed markedly.
But as Americans eschew foreign deals and keep their dollars at home,
and as foreign central banks — especially China — buy Treasury bills,
the United States is absorbing money that used to be scattered around
the globe. And that is making money tighter elsewhere in the world.
The most immediate crisis appears to be in Eastern Europe, where
investors borrowed exuberantly in foreign currencies — notably the euro
and the Swiss franc — using those funds to build office towers and
factories. Their debts are growing as their currencies decline in
value, leading to bank losses and requiring government bailouts along
with aid from the I.M.F..
Economists liken this episode to the financial crisis that assaulted
much of Asia in the late 1990s. Then, as now, investors borrowed in
foreign currencies. When investment left the region, local currencies
plummeted, particularly in Thailand and Indonesia, setting off defaults
and sowing job losses and poverty.
“Eastern Europe looks incredibly similar to Asia in the 1990s,” said
Brad Setser, an economist at the Council on Foreign Relations in New
York.
In one key regard, this crisis is more problematic: In the 1990s, the
rest of the global economy was growing vigorously. Once danger abated,
Asian countries were able to resume growth by selling goods to the
United States, Europe, Japan and China.
Indeed, the very plunge in currencies that precipitated the crisis also
provided a fix, making Thai, Malaysian, Indonesian and Korean goods
that much cheaper on world markets.
This time, as many low-income countries again see their currencies
fall, they are confronting a world beset by recession, in which demand
for their products is weak and falling.
In a report released Sunday, the World Bank predicted that the global
economy would shrink in 2009 for the first time in more than half a
century and forecast that global trade would decline for the first time
since the early 1980s.
“Depreciation isn’t enough now to offset the global contraction,” said
Mr. Setser, noting that export powers like Japan, Korea, Taiwan and
Brazil have had rapid declines in sales in recent months. “Everybody’s
looking vulnerable. All commodity exporters are potentially subject to
currency crises.”
Fears are growing that a much broader group of countries will plunge
into trouble. Mr. Prasad’s list of potential danger zones includes
Vietnam, the Philippines, Malaysia and Indonesia, as well as Pakistan
and Ecuador.
In the Asian financial crisis, countries at the center of the storm
were particularly vulnerable because the values of their currencies
were mostly pegged to the dollar. Once central banks ran out of dollars
to exchange for their own currencies, they lost their ability to
influence the exchange rate. As a result, their currencies fell,
turning already large debts into impossible debts.
Many more countries now allow their currencies to float with the whims
of the market, removing this grim chain of events. Still, as economic
activity slows and banks are stuck with larger losses, the damage could
swell beyond the ability of governments to finance bailouts, said
Kenneth S. Rogoff, a former chief economist at the I.M.F. and now a
professor at Harvard.
“Debt collapses are going to wreak havoc with exchange rates,” Mr.
Rogoff predicted. “A lot of countries in Europe are already on the
brink of default.”
Only two years ago, many analysts were suggesting that the I.M.F. —
created more than 60 years ago to rescue countries in financial
distress — no longer had a clear reason to exist. Now, the fund is
scrambling for contributions from developed nations to bolster its $350
billion war chest. Mr. Setser suggested it needed $1 trillion for all
that might yet unfold.
Because worries are deeper nearly everywhere else, the United States
and the dollar have essentially benefited from the worldwide panic. In
the last year, the dollar has risen 13 percent against major foreign
currencies after adjusting for inflation, according to Federal Reserve
data. Foreign holdings of Treasury bills rose by $456 billion in 2008.
“It’s a huge safe haven effect,” said William R. Cline, a senior fellow
at the Peterson Institute for International Economics in Washington.
“The basic assumption that people are making is that the U.S.
government will never default on its debt.”
As the dominant flavor of money used in business worldwide, the dollar
has once again been affirmed as the global reserve currency.
Only last year, some analysts said that as the American economy sagged,
foreign central banks would be reluctant to sink national savings into
the dollar. That has been soundly debunked.
In ordinary times, the rise of the dollar would provoke American
worries that it would crimp exports by making goods more expensive on
world markets. But for American policy makers, what matters now is
attracting enough buyers of American debt to finance the rescue plans,
and if the dollar must rise along the way, that is a cost worth paying.
“The fact that we can still borrow at lower interest rates is saving us
from much more severe adjustments,” Mr. Rogoff said. “We’re really
still staring down an abyss.”
Op-Ed
Columnist: The Inflection Is Near?
NYTIMES
By THOMAS L. FRIEDMAN
March 8, 2009
Sometimes the satirical newspaper The Onion is so right
on, I can’t resist quoting from it. Consider this faux article from
June 2005 about America’s addiction to Chinese exports:
FENGHUA, China — Chen Hsien, an employee of Fenghua Ningbo Plastic
Works Ltd., a plastics factory that manufactures lightweight household
items for Western markets, expressed his disbelief Monday over the
“sheer amount of [garbage] Americans will buy. Often, when we’re
assigned a new order for, say, ‘salad shooters,’ I will say to myself,
‘There’s no way that anyone will ever buy these.’ ... One month later,
we will receive an order for the same product, but three times the
quantity. How can anyone have a need for such useless [garbage]? I hear
that Americans can buy anything they want, and I believe it, judging
from the things I’ve made for them,” Chen said. “And I also hear that,
when they no longer want an item, they simply throw it away. So
wasteful and contemptible.”
Let’s today step out of the normal boundaries of analysis of our
economic crisis and ask a radical question: What if the crisis of 2008
represents something much more fundamental than a deep recession? What
if it’s telling us that the whole growth model we created over the last
50 years is simply unsustainable economically and ecologically and that
2008 was when we hit the wall — when Mother Nature and the market both
said: “No more.”
We have created a system for growth that depended on our building more
and more stores to sell more and more stuff made in more and more
factories in China, powered by more and more coal that would cause more
and more climate change but earn China more and more dollars to buy
more and more U.S. T-bills so America would have more and more money to
build more and more stores and sell more and more stuff that would
employ more and more Chinese ...
We can’t do this anymore.
“We created a way of raising standards of living that we can’t possibly
pass on to our children,” said Joe Romm, a physicist and climate expert
who writes the indispensable blog climateprogress.org. We have been
getting rich by depleting all our natural stocks — water, hydrocarbons,
forests, rivers, fish and arable land — and not by generating renewable
flows.
“You can get this burst of wealth that we have created from this
rapacious behavior,” added Romm. “But it has to collapse, unless adults
stand up and say, ‘This is a Ponzi scheme. We have not generated real
wealth, and we are destroying a livable climate ...’ Real wealth is
something you can pass on in a way that others can enjoy.”
Over a billion people today suffer from water scarcity; deforestation
in the tropics destroys an area the size of Greece every year — more
than 25 million acres; more than half of the world’s fisheries are
over-fished or fished at their limit.
“Just as a few lonely economists warned us we were living beyond our
financial means and overdrawing our financial assets, scientists are
warning us that we’re living beyond our ecological means and
overdrawing our natural assets,” argues Glenn Prickett, senior vice
president at Conservation International. But, he cautioned, as
environmentalists have pointed out: “Mother Nature doesn’t do
bailouts.”
One of those who has been warning me of this for a long time is Paul
Gilding, the Australian environmental business expert. He has a name
for this moment — when both Mother Nature and Father Greed have hit the
wall at once — “The Great Disruption.”
“We are taking a system operating past its capacity and driving it
faster and harder,” he wrote me. “No matter how wonderful the system
is, the laws of physics and biology still apply.” We must have growth,
but we must grow in a different way. For starters, economies need to
transition to the concept of net-zero, whereby buildings, cars,
factories and homes are designed not only to generate as much energy as
they use but to be infinitely recyclable in as many parts as possible.
Let’s grow by creating flows rather than plundering more stocks.
Gilding says he’s actually an optimist. So am I. People are already
using this economic slowdown to retool and reorient economies. Germany,
Britain, China and the U.S. have all used stimulus bills to make huge
new investments in clean power. South Korea’s new national paradigm for
development is called: “Low carbon, green growth.” Who knew? People are
realizing we need more than incremental changes — and we’re seeing the
first stirrings of growth in smarter, more efficient, more responsible
ways.
In the meantime, says Gilding, take notes: “When we look back, 2008
will be a momentous year in human history. Our children and
grandchildren will ask us, ‘What was it like? What were you doing when
it started to fall apart? What did you think? What did you do?’ ” Often
in the middle of something momentous, we can’t see its significance.
But for me there is no doubt: 2008 will be the marker — the year when
‘The Great Disruption’ began.
Continuing Job
Losses May Signal Broad Economic Shift
NYTIMES
By PETER S. GOODMAN and JACK HEALY
March 7, 2009
Another 651,000 jobs disappeared from the American economy in February,
the government reported Friday, as the unemployment rate soared to 8.1
percent — its highest level since 1983.
The latest grim scorecard of contraction in the American workplace
largely destroyed what hopes remained for an economic recovery in the
first half of this year, and added to a growing sense that 2009 is
probably a lost cause.
Most economists now assume that the American fortunes will not improve
before near the end of the year, as the Obama administration’s $787
billion emergency spending program begins to wash through the economy.
“The current pace of decline is breathtaking,” said Robert Barbera,
chief economist at the research and trading firm ITG. “We are now
falling at a near record rate in the postwar period and there’s been no
change in the violent downward trajectory.”
Indeed, the monthly snapshot of the national employment picture
worsened an already abysmal picture as the government revised upward
the number of jobs lost in December and January. The economy has now
lost at least 650,000 jobs for three consecutive months, the worst
decline in percentage terms over that length of time since 1975.
Since the recession began, the economy has eliminated roughly 4.4
million jobs, and more than half of those positions — some 2.6 million
— disappeared in the last four months.
The acceleration has convinced some economists that, far from an
ordinary downturn after which jobs will return, the contraction under
way reflects a fundamental restructuring of the American economy. In
crucial industries — particularly manufacturing, financial services and
retail — many companies have opted to abandon whole areas of business.
“These jobs aren’t coming back,” said John E. Silvia, chief economist
at Wachovia in Charlotte. “A lot of production either isn’t going to
happen at all, or it’s going to happen somewhere other than the United
States. There are going to be fewer stores, fewer factories, fewer
financial services operations. Firms are making strategic decisions
that they don’t want to be in their businesses.”
For American policy makers, such a reality poses fundamental challenges
to the traditional response to hard times. For decades, the government
has reacted to economic downturns by handing out temporary unemployment
insurance checks, relying upon the resumption of economic growth to
deliver needed jobs. This time, argues Mr. Silvia, the government needs
to put a much greater emphasis on retraining workers for careers in
other industries.
In the auto industry, for example annual American car sales have
dropped from some 17 million a year a few years ago to 9 million now.
Even if sales increase to 10 or 12 million, that still leaves a lot of
unneeded factories.
“That’s a lot of workers that are not coming back,” Mr. Silvia said.
“That’s a lot of steel, a lot of rubber, a lot of suppliers that are
not coming back. It’s really challenging to us as a society.”
President Obama responded to the figures by declaring that “this
country has never responded to a crisis by sitting on the sidelines and
hoping for the best” and asserting that government has a huge role to
play in bringing out the best in the American people.
“I know that throughout our history we have met every great challenge
with bold action and big ideas,” he told police academy graduates in
Columbus, Ohio, on Friday. “That’s what’s fueled a shared and lasting
prosperity.”
Mr. Obama cited the unemployment figures as further evidence that those
who opposed “the very notion that government has a role in ending the
cycle of job loss at the heart of this recession” are on the wrong side
of history. (The president’s stimulus package was approved by the House
with no support from minority Republicans, whose leader, Representative
John A. Boehner, is from Ohio.)
In February, another 168,000 manufacturing jobs were eliminated,
bringing losses over the last year to 1.2 million. In Michigan, where
the troubles of the auto industry have been particularly traumatic, the
unemployment rate is at 10.6 percent, the highest of any state.
“The people who do what I do in the Detroit area are a dime a dozen,”
said Kim Allgeyer, 46, a machine toolmaker in Westland, Mich., who was
laid off in January from a company that makes manufacturing assembly
lines for the Detroit automakers. Since then, he has failed to find
another full-time job, subsisting on day labor and one weeklong stint
for contractors. He is thinking of moving to Louisiana or Mississippi
to seek work as a shipbuilder.
“Who’s going to put me to work?” he asked. “Where’s the work at? It’s
just a great big black hole.”
Much the same can be said for financial services, which gave up another
44,000 jobs in February. During the housing boom, banks hired tens of
thousands of well-compensated traders, analysts and marketers to sell
mortgage-backed securities and other exotic flavors of investments.
That industry is unlikely to return to anything close to its former
shape.
Retailers are shuttering stores as the era of easy money fueled by
rising house prices and abundant credit gives way to a new period in
which millions of households are being forced to confine their spending
to their paychecks, limiting their trips to the mall. The economy lost
39,500 retail jobs in February, and has eliminated more than 500,000 in
the last year.
The United States has been neglecting job training programs for
decades, argues Andrew Stettner, deputy director of the National
Employment Law Project in New York. In current dollars, the nation
devoted the equivalent of $20 billion a year on job training in 1979,
while spending only $6 billion last year.
The stimulus spending bill includes $4.5 billion in additional monies
for job training. But under current programs, many of those eligible
for training are given vouchers that cover only a semester or two at
community colleges, while careers in growth industries like
biotechnology and health care typically require two-year degree
programs.
“We have to seriously look at fundamentally rebuilding the economy,”
Mr. Stettner said. “You’ve got to use this moment to retrain for jobs.”
Friday’s report reinforced the degree to which the economy is being
assailed at once by panic in the financial system, falling household
spending power and plunging real estate prices, with growing numbers of
companies resorting to wholesale layoffs after months of merely
declining to hire.
“There’s been no place to hide,” said Stuart Hoffman, chief economist
at PNC Financial in Pittsburgh. “Everybody in every industry has lost
jobs or is feeling insecure about whether they’re going to keep their
jobs or how their company’s going to do."
Some economists suggested the substantial increase in layoffs reflected
the anxiety that has gripped the financial system since last fall when
major Wall Street institutions failed, notably the giant investment
bank Lehman Brothers. Borrowing costs have spiked for American
companies, making even healthy businesses reluctant to expand and hire.
Perhaps even more decisive, the collapse last fall has left many
companies spooked.
“There was a huge increase in uncertainty and a huge hit to confidence
which caused a large rethinking among businesses,” said Ethan Harris,
co-head of United States economics research. “That caused a big
downshift in employment.”
In similar crises, like the stock market crash of 1987 and the near
collapse of the enormous hedge fund Long Term Capital Management in
1998, dysfunction continued to grip markets for about six months, Mr.
Harris said, suggesting that this episode may be nearing its end.
But history also shows that when fear lifts, the economy returns not to
normalcy but to wherever it was when the crisis began, Mr. Harris said.
That means that even if order is restored to the financial system, the
economy will still be staring at a recession.
And order cannot be restored, many economists say, until the Obama
administration creates and executes a credible plan to remove the bad
loans choking the balance sheets of financial institutions.
“The 800-pound gorilla is whether we face up to the bad loans in the
financial system,” said Alan Levenson, chief economist at the trading
firm T. Rowe Price in Baltimore.
In Revision,
G.D.P. Shrank 6.2% at End of 2008
By THE ASSOCIATED PRESS
February 28, 2009
WASHINGTON (AP) — The government said Friday that the economy shrank at
a staggering 6.2 percent pace at the end of 2008, the worst showing in
a quarter-century. Consumers and businesses ratcheted back spending,
plunging the country deeper into recession.
The Commerce Department figure shows the economy sinking much faster
than the 3.8 percent annualized drop for the October-December quarter
first estimated by the government last month.
It also was a considerably weaker performance than the 5.4 percent
annualized decline economists expected.
Top Republicans
Rip Into Obama Budget Plan
NYTIMES
By REUTERS
Filed at 2:32 p.m. ET
February 26, 2009
WASHINGTON (Reuters) - Congressional Republicans, having vowed to
return to the conservative principle of limited government, denounced
on Thursday President Barack Obama's $3.55 trillion budget as wasteful.
While Obama's fellow Democrats control Congress, he may need the
support of fiscal conservatives in his own party, and possibly some
moderate Republicans, to pass any budget.
"I have serious concerns with this budget, which demands hard-working
American families and job creators turn over more of their hard-earned
money to the government to pay for unprecedented spending increases,"
said Senate Republican Leader Mitch McConnell.
Obama's first budget proposal, for the 2010 fiscal year, includes steps
to end the deepening recession while also enacting a bold agenda to
expand healthcare, upgrade schools, move the U.S. toward energy
independence and rollback tax cuts for the rich. It also foresees a
whopping $1.75 trillion deficit for the 2009 fiscal year, but would
reduce that to $533 billion by 2013.
"I think we just ought to admit we're broke. We can't continue to pile
debt on the backs of our kids and grandkids," said House Republican
Leader John Boehner.
Senator Judd Gregg, who recently withdrew as Obama's nominee to head
the Commerce Department, citing differences over policy, offered a
stinging rebuke of the president's budget plan.
"The budget outline shows a half-hearted attempt to reduce the
trillion-dollar deficits we face, largely through more tax hikes that
will only hurt the economy, when it should take this opportunity to
exercise aggressive spending restraint," said Gregg, the top Republican
on the Budget Committee.
BUSH-ERA DEFICITS
Republicans have long touted themselves as champions of limited
government, but surrendered that claim in approving a series of
big-deficit budgets during the administration of Obama's predecessor,
Republican George W. Bush.
Republicans vow to return to their conservative principles as they seek
to rebound from last November's election when Democrats won control of
both the White House and Congress for the first time since 1992.
House Speaker Nancy Pelosi, a California Democrat, praised Obama's
spending priorities, saying, "At long last a budget that is a statement
of our national values."
Pelosi also tweaked Republicans for what she saw as their new found
interest in limited government.
"Perhaps ... they (the Republicans) have amnesia," Pelosi said, noting
that with Bush at the helm they turned budget surpluses into deficits,
in part through significantly higher government spending.
Boehner acknowledged Republicans spent too much while they were in
charge.
"But if you begin to look at what's happened over the last month and
what's being proposed in this budget, the president is beginning to
make President Bush look like a piker," Boehner said.
Obama and Republicans have promised to try to find common ground, but
success may be elusive. Just three Republicans voted for his stimulus
package earlier this month, and the party was able to force changes
through their ability to stop the legislation with Senate procedural
roadblocks.
"Republicans want to work with the president and Democrats in Congress
on a responsible budget," Boehner said. "But this budget makes clear
that the era of big government is back."
Budgets cannot be subject to such procedural hurdles, but Obama will
likely need bipartisan support to win passage of resulting individual
spending bills.
Obama Budget
Sees $1.75 Trillion Deficit
NYTIMES
By JACKIE CALMES and ROBERT PEAR
February 27, 2009
President Obama’s budget proposal for 2010 projects a stunning deficit
of $1.75 trillion for the current fiscal year, which began five months
ago, reflecting a shortfall of more than $1 trillion as the fiscal year
began, plus the costs of bank bailouts, the first wave of spending from
the newly enacted stimulus plan and the continuing costs of the wars in
Iraq and Afghanistan.
The administration, as it had announced, will try to cut that amount
sharply by 2013, when Mr. Obama’s first term ends, to $533 billion,
even as it escalates spending on crucial priorities.
“There are times when you can afford to redecorate your house,” Mr.
Obama said on Thursday morning, “and there are times when you have to
focus on rebuilding its foundation.”
His administration will attempt to close the large fiscal gap even
while starting a major health-care initiative meant to substantially
extend coverage; to do so, it foresees increasing taxes on the
wealthiest Americans and using revenues from a new program: selling
carbon credits to manufacturers as part of a cap-and-trade plan meant
to slow climate change.
Further savings would come from such items as a proposal to phase out
government payments to crop producers making more than $500,000.
Additional revenues are posited from a tightening of tax-code
enforcement.
The budget projects slightly lower spending on the Iraq and Afghanistan
wars to $130 billion in the 2010 fiscal year, then a much larger drop
beginning in the 2011 fiscal year, when Mr. Obama wants to withdraw
combat forces from Iraq. The basic military budget in 2010 would be
$534 billion in 2010, according to officials who described its outlines
before the formal release of the proposal.
The deficit could grow this year if the economy worsens significantly
and a new infusion of capital into distressed banks is ordered; the
administration has estimated that this might call for adding $250
billion to the cost of the bailout already approved by Congress.
The new proposal for the coming fiscal year and beyond contains many
ambitious and costly programs that would have to be approved by
Congress, including some that Republicans and fiscal hawks are likely
to oppose.
The tax proposal to help pay for health care, coming after recent years
in which wealth has become more concentrated at the top of the income
scale, introduces a politically volatile edge to the Congressional
debate over Mr. Obama’s domestic priorities.
The president will also propose, in the 10-year budget he is to release
Thursday, to use revenues from the centerpiece of his environmental
policy — a plan under which companies must buy permits to exceed
pollution emission caps — to pay for an extension of a two-year tax
credit that benefits low-wage and middle-income people.
The combined effect of the two revenue-raising proposals, on top of Mr.
Obama’s existing plan to roll back the Bush-era income tax reductions
on households with income exceeding $250,000 a year, would be a
pronounced move to redistribute wealth by reimposing a larger share of
the tax burden on corporations and the most affluent taxpayers.
Administration officials said Mr. Obama would propose to reduce the
value of itemized tax deductions for everyone in the top income tax
bracket, 35 percent, and many of those in the 33 percent bracket —
roughly speaking, starting at $250,000 in annual income for a married
couple.
Under existing law, the tax benefit of itemizing deductions rises with
a taxpayer’s marginal tax bracket (the bracket that applies to the last
dollar of income). For example, $10,000 in itemized deductions reduces
tax liability by $3,500 for someone in the 35 percent bracket.
Mr. Obama would allow a saving of only $2,800 — as if the person were
in the 28 percent bracket.
The White House says it is unfair for high-income people to get a
bigger tax break than middle-income people for claiming the same
deductions or making the same charitable contributions.
The officials said the resulting increase in revenues, estimated at
$318 billion over 10 years, would account for about half of a $634
billion “reserve fund” that Mr. Obama will set aside in his budget to
address changes in the health care system. The other half would come
from proposed cost savings in Medicare, Medicaid and other health
programs.
In a document summarizing its proposals, the White House said it would
finance coverage for the uninsured in part by “rebalancing the tax code
so that the wealthiest pay more.”
Among the most challenging areas for reducing spending is in the
Pentagon’s accounts, which have been running at record levels as the
wars drag on, the military expands, and the costs of building new
weapons escalates.
While the budget outline requests a small increase in basic defense
spending, to $534 billion, the Obama administration has made it clear
that it intends to shift some of the money from huge cold war-style
weapons systems to smaller programs focused on fighting insurgents in
Iraq and Afghanistan and new threats to the nation’s cybersecurity.
Internal debate over which programs to cut is still so intense that
Defense Secretary Robert M. Gates has taken the unusual step of
requiring even the members of the Joint Chiefs of Staff to sign
agreements promising not to leak the details. But some clues have
emerged, and defense consultants say it seems clear that expensive
missile defense systems and parts of the Army’s vast modernization
effort will be cut back. Some also say that plans for a new Navy
destroyer are likely to be scrapped.
James McAleese, who advises defense companies, said he expects $2
billion to be slashed from the $9 billion that had been budgeted for
the missile-defense programs, which Mr. Obama questioned during the
presidential campaign. Mr. McAleese said the Army should be able to
hold onto its financing for a network of robots and other sensors to
provide troops with better combat intelligence. But, he said, the
Army’s plans for new ground vehicles are likely to be curtailed or
delayed, with the Obama administration opting instead to upgrade
existing tanks and armored vehicles.
Mr. McAleese said a compromise could be struck over the future of one
of the Pentagon’s marquee programs — the F-22, the world’s most
expensive fighter jet. Now that the Air Force has dropped its
requirement for 381 of the planes, Mr. McAleese and other analysts say
the president could approve 60 more of the planes – at a cost of $9
billion -- over the next 3 years as a hedge against possible rivals
like China, bringing the total to 243. But after Mr. Obama said in a
speech this week that “we’re not paying for cold war-era weapons we
don’t use,” Winslow T. Wheeler, another defense analyst, said that
“could mean bad news for the F-22.”
On the environmental front, the administration is proposing a
comprehensive overhaul of the approach to containing climate change.
Mr. Obama’s blueprint, which will project spending and revenues for the
next decade, will flesh out the president’s thinking on his energy
plans both to cap the emissions of gases, particularly carbon dioxide,
that are blamed for climate change and to spur development of
nonpolluting energy alternatives.
The budget will show the government beginning by 2012 to collect
billions of dollars in revenues from selling permits to businesses that
emit the polluting gases, assuming the president’s energy initiative
becomes law as soon as this year, officials said.
Because utilities and other businesses would presumably pass on their
costs to customers, Mr. Obama will propose to use most of the
government’s revenues from the permits to finance an extension of the
new “Making Work Pay” tax credit beyond the two years covered in the
$787 billion economic recovery plan that was just enacted.
That tax relief, the administration will argue, will offset households’
higher costs for utilities and other products and services from
businesses’ passing on their permit expenses.
That tax credit annually will provide $400 to low-wage and
middle-income workers or $800 to couples; Mr. Obama would like to
increase those figures to $500 and $1,000. The credit phases out for
those with incomes above $75,000 a year and for couples with incomes of
more than $150,000; no benefit would go to individuals with more than
$100,000 income and couples with $200,000.
The tax credit will begin showing up in the form of lower withholding
for eligible workers beginning April 1.
The remainder of the projected revenues from the permits will finance
Mr. Obama’s campaign promise for $15 billion a year over 10 years to
subsidize research and development of alternative energy sources,
officials said. The stimulus package included a multibillion-dollar
down payment to develop a national electricity grid to harness and
distribute energy from such sources, including wind farms.
Behind the numbers in Mr. Obama’s first budget is one of the most
far-reaching domestic agendas in years, and at a time when the
president and Congress are already grappling with an economic crisis
worse than any in decades. The environmental permits would not take
effect until 2012, at which point the administration expects the
economy to have recovered. Similarly, some of the tax increases would
not take effect until 2011.
Democratic Congressional leaders promised to push the agenda, which
parallels their own. “By the end of this year, I want to do something
significant dealing with health care,” the Senate majority leader,
Harry Reid of Nevada, told reporters.
The tax proposals, however, could galvanize Republican opposition and
give conservatives a concrete target for taking on Mr. Obama, who
despite his political strength could find some members of his own party
reluctant to embrace tax increases.
Senator Max Baucus, Democrat of Montana and chairman of the Senate
Finance Committee, who has been drafting a health plan, predicted in an
interview that the Senate could pass legislation by its August recess.
Mr. Baucus acknowledged that “there has to be revenue” to offset the
costs of expanded coverage initially, but he did not endorse the
proposal for limiting wealthy taxpayers’ deductions.
“There will be lots of options to pay it, not necessarily that one,”
Mr. Baucus said.
He would not say what revenue options he would support. But he said tax
increases of some kind would not prevent some Senate Republicans from
aligning with Democrats to pass a health plan.
In the House, the Republican leader, Representative John A. Boehner of
Ohio, telegraphed his side’s opposition to any tax increases.
“Everyone agrees that all Americans deserve access to affordable health
care,” Mr. Boehner said in a statement, “but is increasing taxes during
an economic recession, especially on small businesses, the right way to
accomplish that goal?”
Mr. Boehner likewise criticized Mr. Obama’s cap-and-trade emissions
permits proposal, saying, “Cap-and-trade is code for increasing taxes
and killing American jobs, and that’s the last thing we need to do
during these troubled economic times.”
To finance health care reform, administration officials suggested to
senior aides in Congress on Wednesday that revenues could be raised by
ending the policy of excluding the value of employer-provided health
insurance from income taxes.
But the officials emphasized that the administration was not advocating
that option, which not only is anathema to some in organized labor and
business but also conflicts with Mr. Obama’s position in last fall’s
presidential campaign.
The administration is proposing a number of other politically
contentious ways of offsetting the costs of the health care initiative.
Mr. Obama wants to require drug companies to give bigger discounts, or
rebates, to Medicaid, the health program for low-income people.
Drug makers now must provide Medicaid with a discount equal to at least
15.1 percent of the average manufacturer price for a brand-name
product. Mr. Obama wants to require discounts of at least 22.1 percent.
Pharmaceutical companies have strenuously resisted such proposals in
recent years.
Mr. Obama will also propose cutting Medicare payments to health
insurance companies that provide comprehensive care to more than 10
million of the 44 million Medicare beneficiaries. He says he can save
$175 billion over 10 years with a new competitive bidding system, under
which payments to private Medicare Advantage plans would be based on an
average of the bids they submit to Medicare.
Economic
Scene: Like Having Medicare?
Then Taxes Must Rise
NYTIMES
By DAVID LEONHARDT
February 25, 2009
Toward the end of Monday’s meetings on fiscal
responsibility at the White House, Senator Kent Conrad stood up and
produced a little bolt of honesty. “Revenue is the thing almost nobody
wants to talk about,” said Mr. Conrad, the chairman of the Senate
Budget Committee. “But I think if we’re going to be honest with each
other, we’ve got to recognize that is part of a solution as well.”
Mr. Conrad’s frankness was delivered in the cryptic language of budget
experts, and many people might have missed the point. So allow me to
translate:
Your taxes are going up.
They will probably go up in the coming decade, and the increase will be
permanent. For a half-century, federal taxes have remained fairly
constant relative to the size of the American economy — equal to about
18 percent of gross domestic product. But the 18 percent era has to end
soon.
It won’t end because President Obama is some radical tax and spender,
either. It will end because of a basic economic reality.
Americans have made it clear that they want a certain kind of
government, one that can field a strong military and also maintain
popular programs like Medicare. Yet we are not paying nearly enough
taxes to maintain those programs. Even major changes to the health care
system — the single most important step for closing the budget gap —
will not close it entirely. Taxes must rise, too.
This is a point on which serious Democrats and serious Republicans
agree, even if they do so with euphemism. “We are on an unsustainable
path,” says Peter Orszag, Mr. Obama’s budget director. Judd Gregg, the
ranking Republican on the Senate Budget Committee, has said, “Revenues
are going to have to go up.” Douglas Holtz-Eakin and Dan Crippen,
budget experts who advised the McCain campaign, have quietly
acknowledged the same.
Fortunately, the coming tax increase does not have to be economically
ruinous. Despite all the scary stories you’ve heard, the evidence that
higher taxes necessarily cripple an economy is somewhere between thin
and nonexistent.
When over the past 60 years did the American economy grow fastest? The
1950s and 1960s, when the top marginal tax rate was a now-unthinkable
90 percent. And when over the past generation did the economy grow
fastest? The late 1990s, when President Bill Clinton briefly took
federal taxes to 20 percent of the G.D.P.
The real uncertainty is how, in the current political climate, Mr.
Obama will manage to persuade people that taxes must go up. In his
speech on Tuesday night, he didn’t even try. But he doesn’t have
forever to do so.
Eventually, the foreign investors lending the federal government
billions of dollars every week — to make up for the current gap between
taxes and spending — will need a reason to believe that those loans
will be repaid. Otherwise, they will begin demanding much higher
interest rates. That could create a new financial crisis.
“Something that’s unsustainable, like a dysfunctional relationship, can
go on longer than you expect,” Mr. Orszag has said, “and then end
faster and messier than you think.”
•
In his new book, “The Tyranny of Dead Ideas,” Matt Miller nicely lays
out the history of American taxes. He begins the story with Adolf
Wagner, a 19th-century German economist who predicted that taxes would
rise as societies became wealthier. The idea became known as Wagner’s
Law.
“As people grew more affluent,” writes Mr. Miller, a journalist and a
consultant for McKinsey & Company, “they’d want more of what only
government could provide — a strong military, public order, good
schools and assorted welfare benefits, services that private citizens
would have trouble arranging for on their own.”
The tax increases to pay for these activities do bring a cost: they
reduce people’s incentive to work. But history has shown that this cost
isn’t enormous. Taxes rose sharply in the first half of the 20th
century, starting from just a few percentage points of the G.D.P., and
the country still prospered. So long as the government spends the money
well, the benefits from taxes — security, education, health — can far
outweigh the costs.
To be sure, the federal government is not currently spending its tax
revenue very well. In particular, it’s wasting billions of dollars each
year on health care that doesn’t make people healthier. Unless
Medicare’s policies are changed, this waste will lead government
spending to rise to 32 percent of the G.D.P. over the next three
decades, from 20 percent in recent years.
But an overhaul of the health care system won’t be enough to bring that
number down to the current level of taxes. That’s the whole point of
Wagner’s Law. Over time, societies will spend more of their resources
on services like medical care, since they can already afford basic
material comforts. And these services are precisely the sort of service
that fall to the government.
Think of it this way: A tax increase isn’t so much a barrier to a
society becoming richer as it is a result of a society becoming richer.
To the extent that Mr. Obama has talked about raising taxes, he has
focused on households that make at least $250,000 a year. And their
taxes will certainly need to go up. In the last three decades, as the
pretax income of the top 1 percent of earners has soared, their total
federal tax rate has fallen to 31 percent, from 37 percent, according
to the Congressional Budget Office.
But the problem can’t be solved just by taxing the rich. That top 1
percent pays only about one-quarter of federal taxes. Once the
recession ends, taxes on the not-so-rich will need to rise, too.
There are many ways this could happen. Congress could pass a
consumption tax, which would bring the side benefit of encouraging
people to save more. Or it could raise tax rates. Or it could get rid
of the various subsidies for housing, which create an incentive to
overinvest in housing. (How’s that working out, by the way?)
But none of these ideas would be nearly as painless as the niceties of
tax jargon sometimes imply. In the end, the ideas aren’t just about
“tax simplification” or a “flatter, fairer system.” They’re about
raising taxes.
So how will it happen? The best bet, I think, is a jujitsu strategy:
someone will figure out how to convert weakness into strength.
We find ourselves facing long-term budget deficits largely because we
don’t pay enough heed to the future. Paying less tax in 2009 is
concrete. Leaving our children with a solvent government is less so.
But this same short-sightedness can be turned on itself. In 1981,
President Ronald Reagan named Alan Greenspan to head a bipartisan
commission charged with closing Social Security’s deficit. At the
commission’s recommendation, Congress increased Social Security tax
rates and raised the retirement age. The rub was that most of the
changes didn’t take effect until future years. The last of them still
haven’t taken effect.
Mr. Greenspan’s reputation isn’t what it used to be. But he was onto
something here. Increasing tomorrow’s taxes is much easier than
increasing today’s.
Why Can’t Cerberus
Foot the Bill?
NYTIMES
Editorial
February 23, 2009
When General Motors and Chrysler asked Washington
for more money last week they took very different approaches. In
exchange for an extra $17 billion from taxpayers — on top of the $13
billion it had gotten since December — G.M. said it would reduce costs
by shuttering plants, cutting brands and slashing 47,000 jobs, about a
fifth of its remaining work force.
For its $5.3 billion — on top of the $4.3 billion it has received since
December — Chrysler offered little more than an assurance that it has
already cut costs and accomplished most of what it had to do to become
a valuable, viable company. It offered to trim production by a paltry
100,000 units — leaving it with capacity to make almost one million
vehicles more than it will sell this year — on the questionable
assumption that demand, and its market share, will bounce back next
year.
Chrysler said the only reason it was back asking for more money so soon
was that the car market was worse than it had expected two months ago.
This cavalier approach to the public purse raises a very big question.
If Chrysler is really on track for a turnaround and all it needs is
some financing to get over a bad patch in sales and debt markets, why
doesn’t Cerberus Capital Management, which owns 80 percent of the
company, put up the money itself? Why should taxpayers have to take the
risk? That’s what private equity funds like Cerberus are supposed to do.
Cerberus and Daimler, which retained a stake in Chrysler, have promised
to convert $2 billion in loans to Chrysler into equity, which should
help reduce its debt. But Cerberus said giving fresh money would
violate its fiduciary duty to investors, breaking company rules
limiting how much it can commit to any given investment.
We suspect these rules would be more pliant if Cerberus deemed Chrysler
to be a good deal.
It seems the secretive private-equity fund is willing to gamble on
Chrysler’s survival with the taxpayer’s dime, but not its own.
Chrysler warns that if it doesn’t get more money from Washington it
will have to declare bankruptcy.
Our argument for bailing out Detroit has been based on the notion that
the collapse of the American carmakers would devastate an economy
already reeling from huge job losses.
The case for saving Chrysler is certainly the weakest. It is the
smallest of the Big Three, employing just more than 40,000 hourly
workers. As President Obama and his aides consider whether to supply
new funds, they should carefully weigh all of the arguments.
We do not minimize the personal suffering of Chrysler’s employees if
the company goes under. We urge the White House to carefully analyze
how wide the pain would spread. But we are somewhat skeptical about the
claim in Chrysler’s brief to the Treasury that allowing it to go into
bankruptcy could risk its liquidation, at the cost of hundreds of
thousands and perhaps millions of jobs at Chrysler, its dealers and
suppliers.
It also said a bankruptcy would cost the government more than this
bailout. Given the state of the debt market, it said the government
would likely end up providing the bulk of the so-called
debtor-in-possession financing — an estimated $24 billion — which
allows a company to remain in operation and pay its bills while it gets
through an orderly bankruptcy.
Still, there may be other arguments for saying no to Chrysler. It might
finally shake G.M., its creditors and the autoworkers’ union out of
their complacency, forcing them to reach an agreement to reduce the
beleaguered automaker’s liabilities. Saying no might even make Cerberus
reconsider and put up some cash of its own.
ONE WAY TO UNDERSTAND
AMERICAN POLITICS IS TO CHECK THE VIEW FROM
ACROSS THE POND...
17 February 2009, I-BBC
|
Mr Obama has made the stimulus plan
his priority
|
Q&A: Obama stimulus
plan
US President Barack Obama
has signed into law a slimmed-down economic stimulus plan worth about
$787bn (£548bn) aimed at boosting the US economy.
The signing came after weeks of political wrangling
which saw the original bill altered by Congress.
Its passage into law followed warnings from the
president that the US could face an economic disaster if radical action
was not taken.
What is in the stimulus plan?
The stimulus plan includes a combination of measures
designed to maximise its political support, including tax cuts,
additional spending on infrastructure and aid to the US states, which
are having their own budget difficulties.
Senate Majority Leader Harry Reid said the deal
"bridged differences" between an $820bn House version of the bill and a
different $838bn version approved by the Senate.
The earlier version approved by the House of
Representatives, of which one-third was made up of tax cuts, included a
$500 cut in income tax for individuals.
Another big portion was money to help states close
their budget gaps and avoid laying off state employees, as well as
helping them pay more benefits to the less well-off.
Finally, there were additional funds to invest in
infrastructure projects, such as repairing roads and bridges, improving
home insulation, and repairing classrooms.
The plan agreed by Senate negotiators has more tax cuts
- about 36% of the package - and a smaller amount of aid to states, a
Senate aide told Reuters news agency.
A "Buy American" clause which originally sought to
ensure that only US iron, steel and manufactured goods were used in
projects funded by the bill has been watered down, with a promise the
US will respect its international trade obligations.
However, critics at home and overseas - including
ministers in Europe, Brazil and China - continue to express strong
concern that the provision may encourage protectionism and sour trade
relations.
Why has such a big stimulus plan been proposed?
The US economy is entering its sharpest downturn since
before World War II, according to many economists.
Supporters of the measures say that without the
stimulus, the downturn that began at the end of 2007 could last well
into 2010. The slump has already cost three million jobs.
President Obama has made passing the stimulus package
his priority, saying that millions more jobs could be lost during the
recession.
As US interest rates are already approaching zero, it
is clear that other policies must be considered to revive the economy.
Why was the original plan delayed?
The plan was delayed by partisan wrangling between
Democrats and Republicans in Congress, and differences between views in
the House of Representatives and the Senate as to what should be in the
bill.
The first version of the bill was passed in the House
of Representatives without receiving a single vote from the Republican
side. But it was then modified in the Senate, where the Democrats
needed Republican support to get it through.
The Democrats have a majority, but they fell two votes
short of the 60 required to ensure the Republicans could not block the
bill with a filibuster.
To gain the support of moderate Republicans, Democrats
had to accept a mixture with more tax cuts and less money to help
states and local governments.
And the Senate added $35bn to stimulate house purchase
and $11bn to reduce the cost of buying a car.
Who supported the revised stimulus plan?
It was backed by 246 Democrats in the House of
Representatives. Seven Democrats and all 176 Republicans voted against.
The package received just three Republican votes in the
Senate, but that was enough to under Congress rules to stop the
Republican party using blocking tactics to delay the plan, and it
passed 60-38.
Will it work?
According to the independent Congressional Budget
Office (CBO), the stimulus package is likely to reduce the severity of
the recession, although not eliminate its impact entirely.
The CBO also says that although only a portion of the
stimulus will be spent in 2009, the bulk of the money will be spent by
the end of 2010, when the effects of recession are still likely to be
lingering.
But much will depend on the responses of individuals
and government officials.
Tax cuts will be effective only if people spend rather
than save the extra income they receive.
And infrastructure projects will need to be up and
running quickly to make an impact on unemployment.
How will it be paid for?
The stimulus plan will be funded by borrowing money -
pushing the US budget deficit, which is already projected to rise above
$1 trillion this year.
A $569bn deficit was recorded for the first four months
of the fiscal year that began last October, a record for that period,
the Treasury Department said.
The government says that all the measures in the
stimulus plan are temporary and it is committed in the long term to
bringing the budget back into balance.
But if financial markets become sceptical of that
commitment, they could push up the cost of government borrowing.
And future generations will have to pay
the borrowing costs of the additional debt for many years to come.
|

UBS in Stamford, we think...upper right.
Settlement Reached in UBS
Tax Case
NYTIMES
By LYNNLEY BROWNING
August
1, 2009
Switzerland and the United States reached an agreement in principle on
Friday to settle out of court a closely watched case that seeks to
force the Swiss banking giant UBS to turn over the names of wealthy
American clients suspected of tax evasion, a lawyer for the government
said.
Regarding the issues, “we expect to be able to resolve them in the
coming week,” Stuart Gibson, a Justice Department prosecutor, said
during a conference call with Judge Alan S. Gold of United States
District Court in Miami. Mr. Gibson said a final deal would be reached
by Aug. 7.
Judge Gold said that he would cancel a trial that was scheduled to
begin Monday.
UBS and the Swiss government are battling efforts by the Justice
Department to force it to disclose the names of 52,000 wealthy American
UBS clients suspected of offshore tax evasion. In February, UBS paid
$780 million to settle criminal charges that it helped wealthy
Americans evade taxes on nearly $20 billion hidden in offshore accounts.
Secretary of State Hillary Rodham Clinton is scheduled to meet with the
Swiss foreign minister, Micheline Calmy-Rey, in Washington on Friday to
discuss the matter. The issue has unsettled the Swiss banking industry
and escalated into a diplomatic incident between the two sides.
Swiss Vow to Block UBS From
Providing Data to U.S.
NYTIMES
By DAVID JOLLY
July 9, 2009
PARIS — The Swiss government said Wednesday that it was
prepared to seize U.B.S. client data rather than allow the bank to hand
it over to the United States to settle a tax case.
U.B.S. has refused a demand from U.S. authorities that it turn over the
names of 52,000 American clients, arguing that to do so would be
illegal under Swiss banking secrecy laws and would open it to
prosecution at home. The U.S. Justice Department in February sued
U.B.S., saying it suspected the bank of helping wealthy Americans hide
billions of dollars in secret offshore accounts.
“Switzerland makes it perfectly clear that Swiss law prohibits U.B.S.
from complying with a possible order by the court in Miami to hand over
the client information,” the Swiss Department of Justice and Police
said Wednesday in a statement on its Web site, a day after it made a
filing to the same effect in the U.S. District Court in Miami.
Therefore, “all the necessary measures should be taken to prevent
U.B.S. from handing over the information on the 52,000 account holders
demanded in the U.S. civil proceeding,” it added.
The Swiss government will issue an order explicitly prohibiting U.B.S.
from handing over client information “if circumstances require,” it
said.
U.B.S., the largest Swiss bank, is under great pressure to reach an
agreement. The bank has already paid $780 million and turned over the
names of more than 250 clients to avoid prosecution on allegations that
it defrauded the Internal Revenue Service. Its soured investments, many
on American subprime mortgages, have cost it $53 billion in
write-downs, sending it to taxpayers for a bailout. U.B.S. officials
were not immediately available for comment Wednesday.
“On the one side you have the U.S. government wanting to get back some
missing taxes and on the other you have a bank that is admitting some
responsibility,” said Nicolas Michellod, an analyst in Zurich with
Celent, a financial research firm. “Eventually, I’m sure we’ll see
U.B.S. paying a fine.”
U.B.S. last month raised about $3.5 billion in new capital, and Mr.
Michellod suggested the bank might have been provisioning for just such
an eventuality.
Doris Leuthard, the Swiss economy minister, said Tuesday in Washington
that U.B.S. had made mistakes and would have to “pay a price” to reach
a deal.
The dispute, which has strained relations between the United States and
Switzerland, takes place amid wider efforts by countries including
France, Germany and the United States to increase transparency in tax
havens like the Channel and Jersey Islands, Switzerland and Luxembourg.
Switzerland distinguishes between tax fraud and tax evasion, and does
not consider tax evasion to be a crime.
The Swiss agreed in March to abide by Article 26 of the Organization
for Economic Cooperation and Development’s tax convention, which
requires national tax authorities to exchange information on request if
there is probable cause to suspect tax evasion. But the government has
also said that it “has no intention of relinquishing bank secrecy.”
In Paris, the O.E.C.D. said Wednesday that one of those countries,
Luxembourg, had now "substantially implemented the internationally
agreed standard" of transparency in the exchange of tax information.
While Luxembourg's work is not finished, Angel Gurría, the
organization's secretary general said, “The process is working and I
look forward to other countries following the example that Luxembourg
has set.”
US Steps Up Pressure on UBS in
Bank Secrets Case
NYTIMES
By THE ASSOCIATED PRESS
Filed at 3:02 p.m. ETFebruary 19, 2009
WASHINGTON (AP) -- A government lawsuit Thursday seeks the
identities of tens of thousands of possible U.S. tax cheats who hid
billions of dollars in assets at the Swiss-based bank UBS AG. A defiant
Swiss president pledged to maintain his country's bank secrecy laws.
In the suit filed in Miami, the Obama administration wants UBS to turn
over information on as many as 52,000 U.S. customers who concealed
their accounts from the U.S. government in violation of tax laws.
''At a time when millions of Americans are losing their jobs, their
homes, and their health care, it is appalling that more than 50,000 of
the wealthiest among us have actively sought to evade their civil and
legal duty to pay taxes,'' the acting assistant attorney general, John
DiCicco, said in a statement.
A deal announced Wednesday provides access to about 250 to 300 UBS
customers who used Swiss bank secrecy laws to hide assets. To avoid
prosecution, UBS agreed to pay $780 million. The bank's chairman, Peter
Kurer, said UBS accepted ''full responsibility'' for helping its U.S.
clients conceal assets from the Internal Revenue Service.
But that does not mean the bank is about to fork over information on
thousands of accounts.
On Wednesday, the government claimed in court papers there were close
to 20,000 U.S. clients who hid assets through the UBS program. A day
later, the number had climbed to 52,000. U.S. officials offered no
immediate explanation for the revised estimate, but it was another sign
they are raising the pressure on the Swiss bank.
''This shows the big fight is yet to come,'' said George Clarke, a tax
lawyer based in Washington who is not involved in the UBS case.
For one, UBS said that except for the 250 to 300 U.S. customers, it
will fight to keep all others names private, arguing Swiss secrecy laws
shield them.
Hours before the new suit, Switzerland's president, Hans-Rudolf Merz,
said his country will not relent in defending its treasured tradition
of confidential bank accounts.
''Banking secrecy, ladies and gentlemen, remains intact,'' Merz told
reporters.
Merz said Swiss authorities handed over the files on the 250 to 300
American clients of who are suspected of tax fraud. The transfer took
place in the middle of the night in the Swiss capital, Bern, just ahead
of a U.S. deadline for Swiss cooperation, he said.
But U.S. officials want much more. According to Thursday's filing, the
thousands of accounts in question held about $14.8 billion in assets in
the past decade.
Merz, UBS and Switzerland's financial regulator insist that Thursday's
handover was not a retreat from the principle of banking secrecy
because it involved only a small number of files linked to tax fraud --
and not tax evasion.
Under a 75-year-old law, Swiss banking secrecy can only be lifted when
individuals are deemed to have deliberately defrauded tax authorities,
as opposed to failing to declare all assets. That is a distinction only
Switzerland and other tax havens make.
Experts said the decision to bypass the courts and give up customers
before exhausting all legal options seriously endangers a pillar of the
banking industry that helped transform Switzerland into one of the
world's richest countries.
Lawyers in Zurich, Switzerland, sued the head of Switzerland's
financial services authority FINMA, which authorized the transfer of
files.
It is now for a federal judge in Miami to decide whether U.S. courts
can force a bank to violate Swiss bank secrecy laws and provide the
account information.
According to U.S. officials, an acquisition in 2000 of a U.S. company
brought UBS a host of new American clients. The bank then set about to
evade new reporting requirements for those clients. To do so, UBS
executives helped U.S. taxpayers open new accounts in the names of sham
entities.
The clients, in turn, filed false tax returns that omitted the income
they earned in their Swiss accounts, according to the court papers.
Newly Poor Swell
Lines at Food Banks Nationwide
NYTIMES
By JULIE BOSMAN
February 20, 2009
MORRISTOWN, N.J. — Cindy Dreeszen and her husband live in
one of the wealthiest counties in the United States. They have steady
jobs, his at a movie theater and hers at a government office. Together,
they earn about $55,000 a year.
But with a 17-month-old son, another baby on the way, and, as Ms.
Dreeszen put it, “the cost of everything going up and up,” the couple
went to a food pantry this month to ask for some free groceries.
“I didn’t think we’d even be allowed to come here,” said Ms. Dreeszen,
41, glancing around at the shelves of fruit, whole-wheat pasta and baby
food. “This is totally something that I never expected to happen, to
have to resort to this.”
Once a crutch for the most needy, food pantries have responded to the
deepening recession by opening their doors to what one pantry organizer
described as “the next layer of people,” a rapidly expanding group of
child-care workers, nurse’s aides, real estate agents and secretaries
who are facing a financial crisis for the first time. Over all, demand
at food banks across the country increased by 30 percent in 2008 from
the previous year, according to a survey by Feeding America, which
distributes more than two billion pounds of food every year. And while
pantries usually see a drop in demand after the holiday season, many in
upscale suburbs this year are experiencing the opposite.
Here in Morris County (median household income, $82,173), the
Interfaith Food Pantry added extra hours this month after seeing a 24
percent increase in customers and 45 percent increase in food
distributed in November, December and January compared with the same
period last year.
In Lake Forest, Ill., a wealthy Chicago suburb, a pantry in an
Episcopal church that used to attract people from less affluent towns
nearby has been flooded with people who have lost jobs. In Greenwich,
Conn., one pantry organizer reported a “tremendous” increase in demand
for food since December, with out-of-work landscapers and housekeepers
as well as real estate professionals who have not made a sale in months
filling the line.
And amid the million-dollar houses of Marin County, Calif., a pantry at
the San Geronimo Valley Community Center last month changed its policy
to allow people to stop by once a week instead of every other week,
since there are so many new faces in line alongside the regulars.
“We’re seeing people who work at banks, for software firms, for
marketing firms, and they’re all losing their jobs,” said Dave Cort,
the executive director. “Here we are in big, fancy Marin County, but we
have people who are standing in line with their eyes wide open,
thinking, ‘Oh my God, I can’t believe I’m here.’ ”
The demand is not limited to pantries, which distribute groceries from
food banks, supermarket surplus and individuals who donate through
church or school can drives. The number of food-stamp recipients was up
by 17 percent across New York State, and 12 percent in New Jersey, in
November from a year before. When a mobile unit of the Essex County
welfare office, as part of a pilot program to distribute food-stamp
applications in other counties, stopped in Shop-Rite parking lots
recently in Morris County, it was swamped.
“If one of our richest counties has people signing up for food stamps
who have never signed up before, that indicates the depth of this
problem with the lack of food,” said Kathleen DiChiara, executive
director of Community FoodBank of New Jersey. “It’s the canary in the
coal mine.”
Experts said that chronically poor people tend to adapt to the periods
where money is scarce by asking for support from friends or tapping
into social services, but that working-class people who suddenly lose
jobs or homes often find themselves at sea, unsure how to navigate the
system or ashamed to seek help. It is those people who, over the
last several months, have started arriving in growing numbers at food
pantries, which are often the first tentative step for those whose
incomes are too high to qualify for government assistance. (Many
pantries have a no-questions policy, though they might determine how
many bags of groceries a customer can receive by the number of people
in their household.)
“These are people who never really had to ask for help before,” said
Brenda Beavers, human services director for the Salvation Army in New
Jersey, which dispenses emergency food supplies at 30 pantries
throughout the state. “They were once givers and now they’re having to
ask for assistance.”
In Morristown, Rosemary Gilmartin, executive director of the Interfaith
Food Pantry, has over the last several months watched a steady stream
of new faces pushing shopping carts among the cardboard boxes on metal
shelves in a former nursing home. In 2008, the pantry gave away 620,000
pounds of food, a 24 percent increase from 2007.
Along with fresh apples and Nature’s Path Organic Soy Plus cereal, Ms.
Gilmartin, who began volunteering at the pantry 13 years ago, gives
children “Dora the Explorer” books. In the past few months, she has
found herself fielding more inquiries about social service programs
like the Earned Income Tax Credit from people who clearly had never
before hovered this close to the poverty line.
“They look shellshocked,” she said. “I’ve had people walk back out and
say, ‘I can’t do this.’ ”
She recalled one recent walk-in, a television sound engineer who lost
his house to foreclosure. “His life just went reee-eeer,” Ms. Gilmartin
said, twirling her finger in a downward circle.
Usually, the pantry distributes food at two locations several mornings
a week, including most Saturdays, and on the first and third Wednesday
evenings of the month. But this month, Ms. Gilmartin decided to also
open on the second Wednesday because she has been having trouble
accommodating everyone. By 5:30 p.m. on that Wednesday, a
half-hour before the pantry was to open, a line of nearly two dozen had
formed. Once inside, people were escorted individually through the
shelves of low-fat mozzarella cheese, dried beans and Pepperidge Farm
chocolate chunk cookies, where a few paused — often reluctantly — to
explain what had brought them.
“A deadbeat husband and a loss of a job,” said one woman in her 20s,
who spoke on condition of anonymity because she did not want her
friends to know she had been visiting the pantry. It was her second
visit. The first time, she could barely get out of her car. “Let me put
it this way — it took me a long time to come here,” the woman said as
she added a bag of lentils to her cart. “I felt like a loser. I felt
like a total lowlife.”
A woman wearing gold earrings and a red Vera Bradley bag over her
shoulder, who is in her 50s and gave only her first name, Louise, said
she had recently lost her job and has been struggling to pay her bills.
“I can understand why people would be embarrassed to come here,” she
said, as she loaded her groceries into the trunk of her silver Chevy
Malibu. “I guess I am a little embarrassed.”
Joan Verba, 53, said she had been coming up short financially since she
quit her job as an accountant after her husband became ill with cancer.
When her husband died, leaving her and a 14-year-old son, she put off
plans to re-enter the work force.
“The job market is so bad right now,” she said. “My son eats 24-7. I
just need this to supplement my food bills.”
Her mother, Carol Morrison, stood nearby. “I’m just here for moral
support,” she said, inspecting the shelves. “And nosiness.”
TWO VIEWS OF THE SAME SUBJECT...


These glasses may be half full, half empty,
three-quarters of either, but only one in six looks clear enough to
drink!
The 'stimulus' for unemployment

By ALAN REYNOLDS
Last Updated: 1:45 AM, November 17, 2009
Posted: 12:56 AM, November 17, 2009
Why did the unemployment rate rise so rapidly -- from 7.2 per cent in
January to 10.2 percent in October? It was clearly the administration's
"stimulus" bill -- which in February provided $40 billion to greatly
extend jobless benefits at no cost to the states.
As Larry Summers, the president's top assistant for economic policy,
noted in July, "the unemployment rate over the recession has risen
about 1 to 1.5 percentage points more than would normally be
attributable to the contraction in GDP." And the rate has moved nearly
a percentage point higher since then, even though GDP increased.
Countries with much deeper declines in GDP, such as Germany and Sweden,
have unemployment rates far below ours.
Summers knows why the US rate is so high. He explained it well in a
1995 paper co-authored with James Poterba of MIT: "Unemployment
insurance lengthens unemployment spells."
That is: When the government pays people 50 to 60 percent of their
previous wage to stay home for a year or more, many of them do just
that.
And the stimulus bribed states to extend benefits -- which have now
been stretched to an unprecedented 79 weeks in 28 states and to 46 to
72 weeks in the rest. Before mid-2008, by contrast, only a few states
paid jobless benefits for even a month beyond the standard 26 weeks.
When you subsidize something, you get more of it. Extending
unemployment benefits from 26 to 79 weeks was guaranteed to leave many
more people unemployed for many more months. And longer
unemployment translates to higher unemployment rates -- because the
relatively small numbers of newly unemployed are added to stubbornly
large numbers of those who lost their jobs more than six months ago.
Until benefits are about to run out, many of the long-term unemployed
are in no rush to make serious efforts to find another job -- or to
accept job offers that may involve a long commute, relocation or
disappointing salary and benefits.
(Incidentally, the "mercy" of longer benefits does no long-term favors:
The literature is quite clear that a prolonged period on unemployment
tends to depress income for years after you finally go back to work.)
The median length of unemployment hovered around 10 weeks for six
months before February's "stimulus" plan. Since half the unemployed
found jobs within 10 weeks, more than half of those counted among the
unemployed in one month would no longer be included three months later.
In other words, more frequent turnover among the unemployed held down
monthly unemployment.
But after February, with jobless benefits stretched out to 46 to 79
weeks, the median duration of unemployment nearly doubled, reaching
18.7 weeks by October. The unemployment rate has not been rising
because of growing numbers of newly jobless people. Indeed, initial
claims for unemployment benefits are way down. And the number of
unfilled private job openings increased by 9.3 percent from the end of
April to the end of September.
The unemployment rate has been rising because unprecedented numbers of
those who became unemployed six to 19 months ago are remaining "on the
dole" until their benefits are nearly exhausted.
Summers isn't the only administration economist who understands this
very well. Assistant Secretary of the Treasury for Economic Policy Alan
Krueger co-authored a 2002 survey of the topic with Bruce Meyer of the
University of Chicago. They found that "unemployment insurance and
worker's compensation insurance . . . tend to increase the length of
time employees spend out of work." Last August, Krueger and Andreus
Miller of Princeton also found that "job search increases sharply [from
20 minutes a week to 70] in the weeks prior to benefit exhaustion."
Similarly, Meyer found "the probability of leaving unemployment rises
dramatically just prior to when benefits lapse." In other words: If you
extend benefits to 79 weeks, many people won't find an acceptable job
offer until the 76th or 78th week.
Meyer and Lawrence Katz of Harvard estimated that "a one-week increase
in potential benefit duration increases the average duration of the
unemployment spells . . . by 0.16 to 0.20 weeks." Apply that formula to
the 20-to-53-week extension we've seen, and you get an average of three
to ten more weeks spent on unemployment. And, sure enough, the average
unemployment spell has risen by seven weeks this year -- to nearly 27
weeks by October.
Katz also found that extended benefits, by making it easier for workers
to wait and see whether they get their old jobs back, also makes it
easier for employers to delay recalling laid-off workers. Just before
unemployment benefits run out, Katz found "large positive jumps in both
the recall rate and new job finding rate."
The White House recently made the mysterious claim of having "saved"
640,329 jobs, at a cost of only $531,250 per job ($340 billion).
In reality, the evidence is overwhelming that the February stimulus
bill has added at least two percentage points to the unemployment rate.
If Congress and the White House hadn't tried so hard to stimulate
long-term unemployment, the US unemployment rate would now be about 8
percent and falling rather than more than 10 percent and -- rising.
Job Losses Are
Scarier Now
NYTIMES
Floyd Norris
February 9, 2009, 2:49 pm
I’ve been looking at the unemployment numbers that came out
Friday, and a couple of things stand out. Even though
unemployment is rising rapidly — meaning there are a lot of people
losing their jobs — long-term unemployment is also up a lot. Here are a
couple of comparisons to illustrate that.
Highest overall unemployment rate in each downturn:
Current: 7.6%
2001-03: 6.3%
1990-92: 7.8%
1980-82: 10.8%
1973-75: 9.0%
Highest rate of unemployment for more than 15 weeks, as percentage of
labor force:
Current: 3.0%
2001-03: 2.5%
1990-92: 2.9%
1980-82: 4.2%
1973-75: 3.1%
Over all, the jobless rate is below the early-1990s peak, but the rate
of longer-term unemployment is higher.
Here is another interesting change in the nature of unemployment. In
the early recessions of the post-World War II period, a much larger
proportion of the unemployed were laid off from jobs that they could
expect to get back when the economy recovered. Now, that proportion is
down sharply.
But the percentage of unemployed who lost jobs, with no expectation of
retaining the old job, is at the highest level since the government
started collecting that data in 1967. It is reasonable to think those
people are more worried, and less willing to spend, than are those who
feel sure it is just a matter of time before they get back to their old
jobs.
Here’s the current breakdown of the unemployed, by cause:
Lost job, other than layoff, 48.5%
Layoff, 12.6%
Left job voluntarily, 8.0%
Returning to labor force, 24.1%
New to labor force, 6.8%
(It is worth noting that the word layoff is used in its traditional
sense — a temporary job loss until business improves. Many companies
now use the word layoff to mean any firing, or at least any firing that
is not for cause. Those “laid off” workers are counted in these numbers
as “other than layoff.”)
The cyclical peak for the proportion of unemployed who lost their jobs
for reasons other than layoffs were:
2001-03: 43.6%
1991-92: 44.9%
1980-82: 43.2%
1973-75: 36.3%
This is a secular change in the economy, and one that helps to explain
why consumer fears can be much greater than they were when the overall
unemployment rate was higher.
US
income gap widens as poor take hit in recession
YAHOO
Published on 9/29/2009
WASHINGTON (AP) _ The
recession has hit middle-income and poor families hardest, widening the
economic gap between the richest and poorest Americans as rippling job
layoffs ravaged household budgets.
The wealthiest 10 percent of
Americans - those making more than $138,000 each year - earned 11.4
times the roughly $12,000 made by those living near or below the
poverty line in 2008, according to newly released census figures. That
ratio was an increase from 11.2 in 2007 and the previous high of 11.22
in 2003.
Household income declined across all
groups, but at sharper percentage levels for middle-income and poor
Americans. Median income fell last year from $52,163 to $50,303, wiping
out a decade's worth of gains to hit the lowest level since 1997.
Poverty jumped sharply to 13.2
percent, an 11-year high.
"No one should be surprised at the
increased disparity," said Richard Freeman, an economist at Harvard
University. "Unemployment hurts normal workers who do not have the
golden parachutes the folks at the top have." Read full story,
based upon Census "rolling survey" here.
Obama's
salary cap for
bailout executives could affect few; $500,000 limit not retroactive to
companies that already have funds
DAY
By Ben Feller
Published on 2/5/2009
Washington - Assailing out-of-touch corporate pay and
perks, President Barack Obama on Wednesday slammed a salary cap on top
executives from companies that want bailouts - but it's a limit that
could end up thinning the wallets of only a small number of people.
Obama's action comes as many Americans, while hanging on for economic
life, have watched Wall Street high-flyers receive big-dollar bonuses
even as their firms draw public help for survival. The outcry has grown
with each report of a bailed-out company that plans to buy a jet or
hold a Las Vegas retreat.
The president aimed for a target - extravagant corporate behavior on
the public dime - that fit the mood of the day. His $500,000 salary
limit on executives from a limited number of companies was part of a
broader assault on what he called a “reckless culture” that has helped
wreck the economy.
”We don't disparage wealth. We don't begrudge anybody for achieving
success. And we believe that success should be rewarded,” Obama said.
“But what gets people upset - and rightfully so - are executives being
rewarded for failure, especially when those rewards are subsidized by
U.S. taxpayers.”
Top business leaders often receive annual packages worth several
million dollars, so a $500,000 compensation cap is striking.
Yet in practical terms, the intervention into the corporate world is
also limited.
The compensation cap covers distressed companies seeking special
bailouts but would not apply retroactively to those that already have
received them. What's more, consultants on executive pay say the cap
will probably apply only to a few executives - not big-time traders,
brokers and salespeople who routinely earn whopping pay packages. And
there are sure to be efforts to exploit loopholes as the new rules
start to take hold.
Had the salary cap been in place when the $700 billion bailout program
began, it probably would have applied only to executives at five
companies that have received so-called exceptional help: Chrysler LLC,
General Motors Corp., American International Group Inc., Bank of
America Corp. and Citigroup Inc.
Going forward, the compensation cap would also apply to other banks
that receive more broadly available aid - but they could get around it
by disclosing their plans and involving shareholders in the decision.
Some 360 companies have received such aid. The cap does not apply to
them retroactively, either.
By taking on executive pay and other corporate spending - including
lofty severance packages - Obama sought to get his White House back on
track with an issue that resonates with the public.
His move came one day after the withdrawal of the nomination of Tom
Daschle, his friend and choice to head the Health and Human Services
Department. Daschle got tripped up over, among other things,
overlooking the taxes he owed for the personal use of a car and driver
that was paid for by a company he did consulting work for - the kind of
problem that elicits no sympathy from the public.
Obama's new plan is broad.
Beyond imposing tighter rules on companies that get emergency bailouts,
it also requires more openness and limits for healthy banks that tap
into public money to expand lending. And it envisions broad reforms in
how employees are paid at any public financial institution, even ones
that don't get federal help.
The new treasury secretary, Timothy Geithner - confirmed last week
despite controversy over his own tax problems - said the raft of new
policies is intended to restore the public's trust.
”There is a deep sense across this country that those who were not
responsible for this crisis are bearing a greater burden than those who
were,” he said in announcing the details with Obama.
The half-million-dollar salary cap would apply to institutions that
negotiate agreements with the Treasury Department for “exceptional
assistance.” That means those companies that get their own specialized
help, beyond what is generally available through other financial
shore-up programs.
Such firms could pay senior executives more than $500,000 only by using
stock that could not be sold until the government gets paid back.
Administration aides said trying to impose the salary cap retroactively
would pose both legal and practical problems.
As for a bigger category of generally healthy institutions that get
federal help, they would also face the $500,000 limit for senior
executives. But in their case, the cap can be waived with full public
disclosure and a nonbinding shareholder vote.
Timothy J. Bartl, vice president and general counsel for the Center On
Executive Compensation, said the president's actions involve a special
situation given the government's role bailing out troubled
institutions. “We do not view it as something that ought to be extended
beyond this circumstance,” he said.
On Capitol Hill, some lawmakers had been pushing for even stricter
caps.
The executive-pay limits are a first step, to be followed by the
unveiling next week of a sweeping new framework for spending what
remains of the $700 billion bailout fund that Congress created last
year.
Obama chose blunt language, chiding a “culture of narrow
self-interest,” golden parachute severance packages that “we've all
read about with disgust,” and the “reckless culture and
quarter-by-quarter mentality” that he said has wreaked havoc. He has
been particularly angered by a report last week that employees on Wall
Street received more than $18 billion in bonuses last year while their
eroding financial sector got a massive bailout from taxpayers.
The firms getting “exceptional assistance” from the government would
face stronger rules on employing deceptive practices; stricter limits
on golden parachutes; more disclosure on their salary plans and a
requirement that their boards adopt policies on luxury spending items.
The other firms getting public aid will face a version of those same
rules.
The administration also will propose long-term compensation ideas even
for companies that don't receive government assistance, Obama said.
Among the ideas will be requiring top executives at financial
institutions to hold stock for several years before they can cash
out.
G.M.
and Chrysler Are Closing
Jobs Banks
NYTIMES
By NICK BUNKLEY
January 29, 2009 -
day ahead again.
DETROIT — The era when factory workers who lost their jobs could still
collect nearly their full salary will be over by next week at General
Motors and Chrysler, the two automakers that have borrowed billions of
dollars from the federal government to avoid bankruptcy.
G.M. on Wednesday said that it would eliminate its jobs bank, a program
often held up by critics as a symbol of Detroit’s inefficiency, as of
next Monday. Chrysler ended its jobs bank last Monday.
The United Automobile Workers union agreed to let the carmakers
terminate the programs as one of several concessions offered by its
leadership to help win support for the so-called bridge loans. The
union also said it would delay required payments into a new retiree
health care trust and has begun talks with the companies about other
ways to cut costs in its labor agreements.
G.M. said about 1,600 of its workers are currently in the jobs bank.
They will officially be laid off and begin collecting about 72 percent
of their full-time pay, through a combination of state unemployment
benefits and supplemental benefits from G.M.
“This was a valuable tool to have a work force standing by that was
familiar with how to work in a factory environment,” a G.M. spokesman,
Tony Sapienza, said Wednesday. “Unfortunately that business model
wasn’t sustainable over the long term. As part of the bridge loan
requirements we’re being required to look at our severance policies and
adopt something closer to what’s customary out in the workplace.”
Traditionally, G.M. workers in the jobs bank collected nearly their
full, regular pay, as long as they reported to their plant or another
designated location or they performed volunteer work each workday. But
last month, G.M. cut the pay rate to 85 percent and allowed workers to
stay home.
The Ford Motor Company has not announced changes to its jobs bank. Ford
is the only Detroit automaker not to borrow money from the government,
asserting that it is healthier than its competitors.
As recently as December, the U.A.W. said there were nearly 1,500
workers in Ford’s jobs bank and roughly 700 in the program at Chrysler.
In 2005, before several rounds of buyout and early retirement programs
thinned its ranks, G.M.’s jobs bank covered about 5,000 workers,
costing the company about $500 million a year, according to analysts’
estimates. Foreign-based automakers, like Toyota and Honda, have no
such provisions.
Under the terms of their loans, G.M. and Chrysler have until Feb. 17 to
negotiate cost reductions with the union. They must submit plans
demonstrating their future viability by March 31 to avoid being forced
into bankruptcy.
The U.A.W.’s president, Ron Gettelfinger, said last week that he
thought there would be a plan by the February deadline, though he would
like to have more time for discussions with the companies. He also said
the union should be able to roll back concessions that it makes now
once the companies are profitable again and can pay off their debt to
the government..
“If there’s an entrance, there should be an exit,” Mr. Gettelfinger
said. “We don’t want to make sacrifices that we can never recoup, if
the companies can recoup.”
But it is unclear whether the jobs banks could ever return.
Detroit Calls
Emissions Proposals Too Strict
NYTIMES
By NICK BUNKLEY
January 27, 2009
DETROIT — Automakers said Monday that they were working toward
President Obama’s goal of reducing fuel consumption, but rapid
imposition of stricter emissions standards could force them to
drastically cut production of larger, more profitable vehicles, adding
to their financial duress.
Mr. Obama ordered the government on Monday to reconsider whether
California and other states could regulate vehicle emissions to help
control greenhouse gas emissions, a reversal of a position taken by the
Bush administration.
The announcement came as General Motors and Chrysler are borrowing
billions of dollars from the government to avoid bankruptcy, and as
Toyotaprepares to report its first operating loss in 70 years. Shortly
after the president spoke, General Motors said it would cut 2,000 jobs
at plants in Michigan and Ohio because of slow sales.
The California regulations, if enacted today, “would basically kill the
industry,” said David E. Cole, chairman of the Center for Automotive
Research, an independent research organization in Ann Arbor, Mich. “It
would have a devastating effect on everybody, and not just the
domestics.”
But Mr. Cole said he thought major modifications to the proposed
standards were likely and that action was still “a long ways off,”
giving the carmakers more time to overcome their financial problems and
develop the technologies needed to sell a full lineup of compliant
vehicles.
Right now, carmakers say they would be able to sell only their
smallest, most fuel-efficient cars — models like the Toyota Prius, a
hybrid whose sales have fallen sharply since gas prices began dropping
last fall — because once-popular vehicles like pickup trucks made by
Ford and G.M. are not efficient enough.
“I want clean air and clean water just like the next guy,” said Erich
Merkle, an independent automotive analyst in Grand Rapids, Mich. “But
in the real world, there would be consumer outrage with the fact that
they’re limited to maybe two vehicles and there’s nothing there that
would meet their family’s needs.”
Environmental advocates who have long challenged the automakers’
opposition to the proposed California standards say such regulations
will help the companies produce vehicles that consumers want.
Failing to invest in reducing emissions and increasing efficiency will
only prolong Detroit’s problems, said David Doniger, climate policy
director for the Natural Resources Defense Council.
“I think this is the pathway to their survival,” Mr. Doniger said. “If
carmakers are going to survive in a world of volatile oil prices and
global warming, they have to be making more efficient vehicles. When
the economy comes back and people start buying cars again, they’re
going to expect that gas prices are going to go up, and they’re not
going to want the gas hogs that they used to want. Consumers’ tastes
have changed in terms of what’s cool.”
One concern automakers have with states regulating tailpipe emissions
is that keeping up with a hodgepodge of standards would be difficult.
They expressed support Monday for the ideal of cutting emissions but
want their engineers to be concerned with meeting just one set of
requirements nationally.
The Alliance of Automobile Manufacturers, which represents 11
carmakers, said it favored “a nationwide program that bridges state and
federal concerns and moves all stakeholders forward, and we are ready
to work with the administration on developing a national approach,” in
a statement from the group’s chief executive, Dave McCurdy.
G.M., the only Detroit automaker to issue its own response Monday, said
it was “working aggressively on the products and the advance
technologies that match the nation’s and consumers’ priorities to save
energy and reduce emissions.” But the company also emphasized the need
for “a comprehensive policy discussion that takes into account the
development pace of new technologies, alternative fuels and market and
economic factors.”
Automakers are operating in the worst market since the early 1980s. New
vehicle sales fell nearly 19 percent in 2008 and are universally
expected to be even lower in 2009.
Representative John D. Dingell, Democrat of Michigan, who has long been
one of the Detroit automakers’ strongest allies in Washington, praised
the president’s attitude toward global warmingand expressed hope that
the administration would act only after studying the effect that
“setting a patchwork of different emission standards” would have.
“President Obama and I both share the goal of energy independence and a
cleaner environment for our children and grandchildren,” Mr. Dingell
said in a statement. “We have a unique opportunity in history to
address the issue of global climate change and we must take bold and
balanced action.”
Mr. Cole, the Center for Automotive research chairman, said he believed
Congress would ensure Detroit would be able to live with any new
standards.
Micro and macro economics!

Killing two birds with one stone department: which
would you rather have in a winter
emergency? (Photos: Toyota
(top); Daniel Steger/OpenPhoto.net)
Prius: It’s Not Just a Car,
It’s an Emergency Generator
NYTIMES
By Kate Galbraith
December 23, 2008, 9:58 am
The Prius has a new use, and it does
not involve driving. The Harvard Press — which serves the Massachusetts
town of Harvard as opposed to the university — reported that the car’s
battery helped keep the lights on for some locals during the recent ice
storms.
The newspaper reports that John Sweeney, a resident who lost power,
“ran his refrigerator, freezer, TV, woodstove fan, and several lights
through his Prius, for three days, on roughly five gallons of gas.”
Said Mr. Sweeney, in an e-mail message to The Press: “When it looked
like we were going to be without power for awhile, I dug out an
inverter (which takes 12v DC and creates 120v AC from it) and wired it
into our Prius.”
According to the newspaper, “the device allowed the engine to run every
half hour, automatically charging the car battery and indirectly
supplying the required power.”
In fact, this development, which comes at a tough time for Toyota,
which makes the Prius, may not be not as strange as it sounds. Mr.
Sweeney’s tinkering is along the lines of the “smart grid” technology
that many utility executives and other experts say lies in our future.
The idea is that the battery of an electric car — a plug-in, in most
smart-grid scenarios — can feed power to the electricity grid when the
grid needs it.
Even President-elect Barack Obama has endorsed this idea, as seen
toward the end of this YouTube clip in which he said: “We’re going
to
have to have a smart grid if we want to use plug-in hybrids — then we
want to be able to have ordinary consumers sell back the electricity
that’s generated.”
Mr. Sweeney, out of necessity, got there first.
Downturn Will
Test Obama’s Vision for an Energy-Efficient Auto Industry
NYTIMES
By MICHELINE MAYNARD
December 21, 2008
DETROIT — President-elect Barack Obama leveled a stern warning at
General Motors and Chrysler last week after the federal government
promised them billions to help them survive: “The auto companies must
not squander this chance to reform bad management practices.”
Once he takes office, the bailout will give him a tool to prod the
industry to change, but it will also test his resolve as he pushes it
in new directions. Mr. Obama, after all, has been thinking out
loud about the future of the American automobile industry for years,
well before his presidential campaign began. He co-sponsored two bills
in 2006, during his second year as a United States senator — one to
raise fuel economy standards, and the other to encourage the use of
alternative fuels. His writings and speeches on the auto industry
suggest a keen interest in finding ways, including new technology, to
improve the fuel efficiency of the cars and trucks that Americans drive.
But with Detroit in a fragile financial state, it is unclear how many
compromises he will have to make in pursuing his agenda for the auto
industry, as he juggles other priorities like providing a stimulus
program for the broader economy. The United Automobile Workers union,
which backed Mr. Obama, will want a say in the changes he envisions for
the automakers. And the car companies, which have long lead times
to develop products, will need sales of big trucks and sport utility
vehicles, which may pick up again as gas prices fall, to bring in
much-needed revenue.
By all accounts, Mr. Obama’s personal interest in the industry stems
from his interest in environmental issues, and he has a ready resource
about how the industry operates in Martin Nesbitt, a close friend who
worked in financial planning at G.M. Mr. Obama delivered his
clearest prescription to the automobile industry in May 2007, when he
appeared at Cobo Convention Center in downtown Detroit before an
audience of 2,000 auto industry executives. In a speech to the
Economic Club of Detroit, Mr. Obama said the Big Three had done little
to lessen the nation’s dependence on foreign oil and needed to improve
their vehicles’ fuel efficiency.
“The auto industry’s refusal to act for so long has left it mired in a
predicament for which there is no easy way out,” Mr. Obama said.
He added, “For years, while foreign competitors were investing in more
fuel-efficient technology for their vehicles, American automakers were
spending their time investing in bigger, faster cars. And whenever an
attempt was made to raise our fuel efficiency standards, the auto
companies would lobby furiously against it.”
He suggested initiatives similar to the legislation he had introduced
in Congress, and which he emphasized in his campaign. They included a 4
percent annual increase in the Corporate Average Fuel Economy
standards, equal to about one mile per gallon a year, and incentives
for the companies to develop more fuel-efficient cars. Mr. Obama
said he would provide up to $3 billion to Detroit auto companies and
their suppliers to retool their factories in order to produce smaller,
more fuel-efficient vehicles. Still, with gasoline prices falling
again, it is unclear whether consumer demand will shift so dramatically
to small cars.
Congress later included up to $25 billion for the companies for the
retooling. General Motors and Chrysler initially tried to tap that
money for their depleted cash reserves, before receiving assistance
from the Bush administration. Environmentalists say the speech in
Detroit was a sign of commitment to prodding the auto companies to
build more fuel-efficient vehicles.
“I think he gets it,” said Daniel Becker, director of the Safe Climate
Campaign for the Center for Auto Safety, a Washington consumer advocacy
group. “The speech at Econ Club was a brave one, but a thoughtful one.”
Mr. Obama, who received standing ovations at the beginning and
conclusion of his speech, said he wanted to be blunt with the Detroit
companies on their home turf.
“I’m making this proposal here today because I don’t believe in making
proposals in California and giving a different speech in Michigan,” he
said. His goal was “not to destroy the industry, but to help bring it
into the 21st century,” he said.
A year earlier, in his 2006 book, “The Audacity of Hope,” Mr. Obama
wrote that “fuel-efficient cars and alternative fuels like E85, a fuel
formulated with 85% ethanol, represent the future of the auto industry.
It is a future American car companies can attain if we start making
some tough choices now.”
He also did not spare the U.A.W. from criticism.
“For years,” Mr. Obama wrote, “U.S. automakers and the U.A.W. have
resisted higher fuel-efficiency standards because retooling costs
money, and Detroit is already struggling under huge retiree health-care
costs and stiff competition.”
With Detroit in crisis, there is little room for hesitation after Mr.
Obama reaches office. His Treasury Department will have to assess
whether the union and the companies have met the requirements of the
loans given them by the Bush administration, which legal experts say
Mr. Obama could easily amend. But he also has said that he wants
to protect American jobs.
Soon after President Bush finished announcing the terms of the $17.4
billion in assistance for the auto companies on Friday, the U.A.W.
union was calling on Mr. Obama, for whom they rallied support in
important Midwestern states, to revise it. They wanted him to
discard a requirement that auto workers agree to wage and benefit
concessions that would bring their compensation in line with that paid
nonunion workers.
Mr. Obama was advised in the bailout discussions by a former Federal
Reserve chairman, Paul A. Volcker, who was at the Fed when Congress
approved assistance to Chrysler in 1979; Austan Goolsbee, a professor
of economics at the University of Chicago; and Joshua Steiner, a former
Treasury official with a background in restructuring.
Brian Johnson, a veteran industry analyst with Barclays Capital, said
the outgoing Treasury secretary, Henry M. Paulson Jr., had “tied up
this money with some string.” He added that the “U.A.W. is going to
request it to be untied, and the question is whether Obama will untie
the string.”
On Friday, Mr. Obama reiterated in a statement that all parties in the
industry should have to give up something so the auto companies could
revive and change.
“There are going to be some painful steps that have to be taken,” he
said later at a news conference.
No matter the steps Mr. Obama takes, he is likely to seek a range of
opinions. That is what happened in June 2006, when he invited a group
of environmental leaders to meet with him to discuss legislation that
would increase fuel economy. At the time, none at the meeting
knew that Mr. Obama planned a presidential bid, said Mr. Becker, who
was then representing the Sierra Club. He said that Mr. Obama
told them: “If you guys think this is helpful, then I want to go ahead
and push this. But if you don’t think it’s helpful, I’ll drop it. I
don’t have to do this.”
Nonetheless, Mr. Becker, a longtime critic of Detroit’s environmental
policies, said he did not believe that Mr. Obama would force the car
companies to submit to drastic measures.
“I don’t think they need to be afraid of Obama. He’s not going to say
‘by next Tuesday, everything has to be 40 miles per gallon,’ ” Mr.
Becker said. “But in 10 years? Maybe.”
Bush Approves $17.4 Billion
Auto Bailout
NYTIMES
By DAVID M. HERSZENHORN and DAVID E. SANGER
December 20, 2008 - this is the
19th guys...
WASHINGTON — President Bush on Friday announced $13.4 billion in
emergency loans to prevent the collapse of General Motors and Chrysler,
and another $4 billion available for the hobbled automakers in February
with the entire bailout conditioned on the companies undertaking
sweeping reorganizations to show that they can return to profitability.
The loans, as G.M. and Chrysler teeter on the brink of insolvency,
essentially throws the companies a lifeline from the taxpayers that
will keep them afloat until March 31. At that point, the Obama
administration will determine if the automakers are meeting the
conditions of the loans and will continue to receive government aid or
must repay the loans and face bankruptcy proceedings.
Mr. Bush made his announcement a week after Senate Republicans blocked
legislation to aid the automakers that had been negotiated by the White
House and Congressional Democrats, and the loan package announced by
the president includes roughly the identical requirements in that bill,
which had been approved by the House.
Mr. Bush, in a televised speech before the opening of the markets, said
that under other circumstances he would have let the companies fail, as
punishment for bad business decisions. But given the economic downturn,
he said the government had no choice but to step in.
“These are not ordinary circumstances. In the midst of a financial
crisis and a recession, allowing the U.S. auto industry to collapse is
not a responsible course of action” Mr. Bush said.
He said that bankruptcy was not a workable alternative. “Chapter 11 is
unlikely to work for the American automakers at this time,” Mr. Bush
said, noting that consumers would be unlikely to purchase cars from a
bankrupt manufacturer.
The loan deal also requires the companies to quickly reduce their debt
by two-thirds, mostly through debt-for-equity swaps, and to reach an
agreement with the United Auto Workers union to cut wages and benefits
so they are competitive with those of employees of foreign-based
automakers working in the United States.
The debt reduction and the cuts in wages were central components of
proposal by Senator Bob Corker, Republican of Tennessee, who tried to
salvage the bailout legislation.
Those talks had deadlocked on a demand by Republicans that the wage
cuts take effect by a set date in 2009, while the union had pressed for
a deadline in 2011 after its current contract expires.
The plan announced on Friday by Mr. Bush offered a compromise between
those positions, by making the requirements non-binding, allowing the
automakers to reach different arrangements with the union, provided
that they explain how those alternative plans will keep them on a path
toward financial viability.
To gain access to the emergency loans, G.M. and Chrysler must agree to
a range of concessions, including limits on executive pay and the
elimination of their private corporate jets.
Under the plan, Mr. Bush essentially handed off to President-elect
Barack Obama what will become one of the first, most difficult calls of
his presidency: a political and economic judgment about whether G.M.
and Chrysler are financially viable. Ford is not seeking immediate
government help.
If, by March 30, the two companies cannot meet that standard — and
clearly they could not meet it today — the $13.5 billion in Treasury
loans would be “called” for immediate repayment, with the government
placed in priority, ahead of all other creditors.
To avoid that fate, the companies will need to complete negotiations
with the unions, the creditors, the suppliers and the dealers by March
30. Any judgment on the accords they reach with those groups will
inevitably be both economic and political.
Mr. Obama and his economic team will have to make a convincing, public
case that the wage cuts, plant closings and creditor agreements so
change the landscape of the industry that the carmakers can turn
profitable in short order.
But Mr. Obama will be under tremendous political pressure as well,
because if his new team concludes that the automakers have not struck
the right deals, it would mean a move to bankruptcy court, and likely
widespread layoffs that would ripple far beyond the companies
themselves.
Mr. Obama was elected partly with the enthusiastic support of the
unions, who liked his talk of protecting jobs by renegotiating trade
agreements. Now, in his first months, he will be asking them to give
back gains they have negotiated over decades.
Because the bailout legislation failed in Congress, senior
administration officials said that the loan package would essentially
take the form of a contract between the government and the automakers.
Officials said they expected those contract agreements would be signed
by the end of the day.
In recent days, G.M. and Chrysler have found themselves in an
increasingly precarious financial position, with some industry experts
predicting that they could not survive through the month without
government aid.
Both companies had enlisted teams of bankruptcy lawyers to prepare for
a collapse. And they have announced drastic cutbacks, including an
extension of the normal holiday-season idling of factories, with some
operations to be suspended for a month or more.
Other automakers, including Honda and Ford, have announced cutbacks in
production as the entire industry deals with the economic downturn and
a plunging demand for cars among consumers.
Ford, which is in better financial condition that G.M. and Chrysler,
has said that it does not intend to tap the emergency government aid.
While the legislation that failed in Congress would have provided $14
billion in federally subsidized loans using money that had already been
appropriated to help the automakers retool to make advanced fuel
efficient vehicles, the loans announced by Mr. Bush will be financed by
the Treasury’s $700 billion financial system stabilization program.
The additional $4 billion in loans available for the auto industry in
February will be contingent on Congress releasing to the Treasury the
second half of that bailout fund. The Treasury has not yet requested
the second $350 billion.
And while the legislation would have created a new position within the
executive branch to oversee the automakers, a so-called “car czar” Mr.
Bush said on Friday that while he remains in office, the emergency loan
program will be supervised by the Treasury secretary, Henry M. Paulson
Jr.
In a statement, G.M. reacted with a mixture of gratitude and relief.
“We appreciate the president extending a financial bridge at this most
critical time for the U.S. auto industry and our nation’s economy,”
Greg Martin, a company spokesman, said. “This action helps to preserve
many jobs, and supports the continued operation of G.M. and the many
suppliers, dealers and small businesses across the country that depend
on us.”
In his statement, Mr. Martin said that the emergency loans would allow
G.M. “to accelerate the completion of our aggressive restructuring plan
for long-term sustainable success.” He added: “It will lead to a
leaner, stronger General Motors.”
In a statement to employees, Robert Nardelli, the chief executive of
Chrysler, said the company would hold up its end of the bargain.
“As outlined in our submission to Congress, we intend to be accountable
for this loan, including meeting the specific requirements set forth by
the government, and will continue to implement our plan for long-term
viability,” Mr. Nardelli said. “The receipt of this loan means Chrysler
can continue to pursue its vision to build the fuel-efficient,
high-quality cars and trucks people want to buy, will enjoy driving and
will want to buy again.”
Both G.M. and Chrysler stock rose sharply after the opening and Mr.
Bush’s announcement helped send the broader markets higher as well.
But some critics of a taxpayer-financed rescue of the auto industry
have warned that the money will just be wasted on companies who are
suffering not because of the recent economic downturn but because of
decades of failed business decisions.
A number of Republican Senators who had opposed the auto rescue
legislation wrote to Mr. Bush in recent days urging him not to tap the
Treasury’s financial stabilization program to help G.M. and Chrysler.

Free for all or free trade?
South Korea Trade Fight
Gets Ugly
NYTIMES
By MARTIN FACKLER
December 19, 2008
TOKYO — The parliamentary battle over a contentious free
trade deal in South Korea led to a confrontation on Thursday in which
opposition lawmakers used a sledgehammer to knock down the doors of a
blockaded room in which a committee was discussing the agreement.
Television footage showed fire extinguishers being sprayed at the
opposition lawmakers trying to get into the room . At least one person
was shown bleeding from the face.
The members of the opposition Democratic Party were trying to stop the
trade agreement with the United States from advancing to the floor of
parliament for a final vote. The governing party has been seeking to
ratify the trade pact by year’s end, saying it would improve South
Korea’s competitiveness and ties with the United States. Opponents say
it will hurt South Korean farmers.
Violent clashes in the South Korean parliament, called the National
Assembly, are not unheard of, reflecting the nation’s feisty brand of
democracy. The trade agreement with the United States has been a
particularly thorny issue, after massive demonstrations in Seoul
earlier this year against the import of American beef.
Thursday’s assault came after the opposition party had threatened to
block the deal by using physical force if necessary. Fearing an attack,
members of the foreign affairs committee, under control of the
governing Grand National Party, had barricaded themselves inside the
room as they met.
Security guards and aides from the governing party stood outside the
barricaded doors, where scuffles broke out when a dozen opposition
lawmakers showed up. The opposition lawmakers then used at least one
sledgehammer and crowbars to tear through the doors, only to be
thwarted by piles of furniture thrown up as a second line of defense.
The mayhem failed to prevent the pact from being formally introduced to
the committee, a step in the process of bringing it to a full
parliamentary vote.
The deal to lower tariffs and other trade barriers was signed last year
by negotiators from South Korea and the United States, but cannot take
effect until ratified by lawmakers in both nations.
The pact faces stiff opposition in United States Congress, where many
fear it could disadvantage struggling American automakers.
MALL
PALL: link to really long NYTIMES article
F.I.R.E.
sale? Finance, Insurance and
Real
Estate gloomy...other sectors?
Skyscrapers coming down in price in 2009...


General Growth Properties Files
for
Bankruptcy in 2009, follow-up story here.
This is the firm that bought Harbor Place and South Street
Seaport (South Street Seaport - some wonderful
restaurants in
this row - or at least there were when I worked downtown a zillion
years ago!)- and other major Rouse
projects.
Recession Knocks Some Tenants Out Of Malls,
Opens Doors To Others
By RINKER BUCK, The Hartford Courant
February 21, 2010
AVON —
Route 44 between New Hartford and Avon, the commercial Nile of the
Farmington Valley, is in the midst of a drought.
Along the 7-mile stretch of upscale malls, retail stores and furniture
stores, there are now more than 40 empty storefronts, transforming a
road that once expressed Connecticut's prosperity into one that
symbolizes an evolving New England economy.
While the blight of store closings and business abandonments along
Route 44 seem to have struck smaller, local businesses harder, even the
owners of larger malls that house big national brands say that a few,
early signs of recovery are being masked by the psychological impact of
the recession.
"It's a tenants' market right now, and when you are dealing with big,
national name-brand tenants, they are not at all bashful about asking
for expensive changes before they lease space," said Sharon Maddern,
director of leasing at David Adam Realty in Westport, which owns the
Avon Marketplace on Route 44, just east of the Simsbury line.
"In this environment, it can take nine months to reach a signed lease
with a tenant, and then even more time to make changes before someone
moves in," she said. "To shoppers driving into the parking lot, this
looks like a vacancy that you can't rent."
Avon Marketplace's recent experience typifies this effect. Over the
past year, the mall has lost a string of tenants that include Gap
Inc.'s troubled Banana Republic, the Sharper Image, Bath and Body Works
and Express, creating a long row of vacancies that runs west from the
Orvis store. In fact, Maddern said, most of this space already has been
rented for a new Ulta cosmetics store and another large national tenant
that she can't name yet. But with Ulta not even scheduled to move in
until August, the impression of shuttered stores remains.
This is one impact of recession-era economics that most worries retail
economists. Closed stores attract less traffic to a mall parking lot
and convey to consumers a gloomy message about the economy,
discouraging shopping. But the Orvis store anchoring the corner of the
mall doesn't seem to have been affected.
"When [Banana Republic, Sharper Image and Express] were gone, I thought
we weren't going to do well," said Orvis store manager Dean Tsantilis.
"I thought we might be next. But then we did very well in the fourth
quarter."
Bucking A Trend
But Orvis was bucking what is clearly a regional and national trend.
Since the fall of 2007, when economists generally agree the present
recession began, shopping center vacancy rates in the Hartford area
have grown from just above 7 percent to almost 9 percent today,
according to the CoStar group of Bethesda, Md., which compiles national
statistics on commercial real estate. This compares with a national
shopping center vacancy rate that rose from 8.3 percent in 2007 to
almost 11 percent at the end of December 2009, CoStar says.
Connecticut's slightly lower vacancy rate is easy to explain, said Mark
Hickey, a real estate economist with PPR Research in Boston, part of
the CoStar group.
"The Northeast is generally better off in vacancy rates because we
simply don't have the room to build," Hickey said. "The national rates
are much worse because in states like Florida or Arizona, there's a lot
of room to expand, and building starts are often based on optimistic
population projections of people moving in from New York and
California. They overbuilt, so now they have higher vacancy rates.
"Unlike the Southwest or the Southeast, where the retail market is in
intensive care, the market in Hartford will get out of the recession
with only a few wounds to lick."
Recession Is Helpful
That seems to be the attitude at The Shoppes at Farmington Valley mall
in Canton where, despite four vacancies, managers say the shopping
center is 96 percent occupied.
"This may sound weird, but what's happening with the national economy
will actually end up helping shopping centers like The Shoppes," said
Brian Sierra, a vice president at WS development in Chestnut Hill,
Mass., which owns the complex.
"The tenants that we lost during the recession tend to be weaker, more
vulnerable players who were more subject to an economic downturn. Now
we're re-leasing to stronger tenants — Feng, J. Crew and Sephora — who
have the staying power to outlast a recession."
Local retailers with a strong specialty edge may enjoy the same
advantage.
"Our business certainly isn't what it was three years ago, but we'll
definitely survive," said Peter Scott, co-owner of The Perfect Toy
along Route 44 in Avon. "There's certainly a psychological effect along
Route 44 as people see all of the vacant space. But my personal opinion
is that retail space along Route 44 was over-expanded to begin with.
The recession is just weeding out a lot of weaker retailers."
And the recession may be changing the mix along Route 44 in ways that
economists and experienced commercial retail players say will
eventually help the Farmington Valley.
"No one is expecting a fast recovery, but there is one clear change
we'll probably see soon," said Michael Goman, a commercial real estate
adviser who helped develop the Simsbury Commons mall along Route 44.
"There are a lot of strong retailers in other parts of the country who
would love to get into this market, but always thought they couldn't
because New England is perceived as an expensive place to rent.
"But with rentals dropping because of vacancies, we're going to attract
a lot of California and Midwest chains that have never been here
before," he said. "It will mean a lot more choice for shoppers."
That possibility isn't lost on other developers.
"I'll be spending the first week of March in California, just meeting
with prospective new tenant after prospective new tenant," said WS
Development's Sierra. "A lot of these shopping centers could look
different a year from now. Outside of the Northeast, there's a lot of
awareness that the recession spells opportunity for expanding
retailers."
•Courant staff writer Melissa Traynor
and news information specialist Cristina Bachetti contributed to this
story.
Copyright © 2010, The Hartford
Courant
General Growth shares rise in Big Board return
YAHOO
March 5, 2010
NEW YORK (Reuters) – Shares of General Growth Properties (GGP.N) rose
on Friday, their first day back on the New York Stock Exchange, even as
the U.S. mall owner operates under bankruptcy protection.
Shares of the real estate investment trust were up 2.3 percent to $14
in late morning trade. The shares had hit a high of $14.40 earlier in
the session.
The shares have not yet returned to the S&P 500 index or the
benchmark MSCI U.S. REIT Index (.RMZ), which was up 1.3percent.
Although rare, General Growth is not alone as having its shares trade
on the Big Board while operating under Chapter 11 bankruptcy protection.
A representative of the exchange did not know how many of the
approximately 2,425 companies trading on the New York Stock Exchange
were in chapter 11.
But there are a handful of companies, such as W.R. Grace that have
continued to trade on the Big Board after filing for bankruptcy.
However, unlike those companies, General Growth had been delisted after
its April filing and has now returned.
To be listed on the Big Board, a company has to reach certain
parameters, such as valuation.
By market cap value, General Growth is over $4 billion, making it the
15th-largest publicly traded REIT. Before General Growth's re-entry,
128 REITs traded on the NYSE, according to the National Association of
Real Estate Investment Trusts.
About half of General Growth's shares are owned by hedge fund manager
William Ackman of Pershing Square Capital Management and by Chairman
John Bucksbaum and his family or family's trust.
Among the institutional owners are Morgan Stanley (MS.N), Fidelity
Management & Research and Norges Bank, according to Thomson Reuters
data.
General Growth Properties to relist shares
on NYSE
YAHOO
March 2, 2010
CHICAGO – General Growth Properties Inc., which last year filed the
largest U.S. real estate bankruptcy case in history, said Tuesday that
it applied to relist its shares on the New York Stock Exchange.
General Growth said its shares will start trading on the NYSE on Friday
under the ticker symbol "GGP." General Growth shares currently trade
over the counter.
Last month General Growth received a $10 billion takeover bid from
rival Simon Property Group Inc., which controls some 382 properties
worldwide.
General Growth rebuffed the unsolicited offer from Simon as being too
low. The company then turned to Canada's Brookfield Asset Management
Inc. and reached a deal that will speed its exit from bankruptcy
protection. Speculation had swirled for weeks that General Growth might
turn to Brookfield, which has been looking to expand its slate of U.S.
retail properties and last year acquired an undisclosed stake in the
company.
General Growth, the second-largest shopping mall operator in the U.S.,
filed for bankruptcy last April after it expanded aggressively during
the real estate boom. The company amassed $27 billion in debt, but was
left unable to refinance its short-term loans after financing dried up.
General Growth owns or runs more than 200 shopping malls in 43 states.
It also has ownership in planned community developments and commercial
office buildings.
CT
connection...
Simon Property offers $10B deal for General Growth; Crystal Mall owner makes hostile bid for
bankrupt giant
DAY
The Associated Press
Article published Feb 17, 2010
The nation's largest shopping mall owner, Simon Property Group, made a
$10 billion hostile bid Tuesday to acquire its ailing rival, General
Growth Properties. The deal would allow General Growth, the No. 2
owner of shopping centers, to emerge from Chapter 11 bankruptcy
protection.
Locally, Simon operates the Crystal Mall in Waterford and the upscale
Clinton Crossings outlet mall in Clinton. Simon Property Group is based
in Indianapolis.
General Growth filed for bankruptcy last year after buckling under the
weight of billions in debt it racked up during a massive expansion
effort fueled by cheap credit. General Growth's best known centers
include the Glendale Galleria in Southern California and the South
Street Seaport in Manhattan.
The offer would fully repay $7 billion to General Growth's unsecured
creditors and $3 billion to shareholders.
Stockholders would get $6 a share in cash and $3 a share in other
assets. The offer, however, might be amended so shareholders could
receive Simon stock instead of cash.
Simon made the public offer after General Growth executives failed to
make a "substantive response" Simon's overtures.
"Simon's offer provides the best possible outcome for all General
Growth stakeholders," said David Simon, chairman and CEO, in a
statement.
Though the official committee for General Growth's unsecured creditors
has backed the deal, stockholders appeared to be looking for a sweeter
offer from Simon or one of its competitors.
Chicago-based General Growth had no comment.
Simon, unlike many of its competitors, has been able to weather the
economic downturn thanks in part to its higher rents. The
Indianapolis-based company popularized the so-called lifestyle center
mall design that turned malls into veritable neighborhood-like
communities. The company owns more than 380 properties, including
the
Houston Galleria and the Fashion Valley Mall in San Diego.
Earlier this month, Simon reported a decline in fourth-quarter results,
in part due to a one-time charge. But it still managed to beat Wall
Street forecasts and its revenue held steady.
Simon Properties offers
General Growth $10B buyout
YAHOO
Feb. 16, 2010
INDIANAPOLIS – Mall owner Simon Property Group said Tuesday that it
made a $10 billion offer to acquire its ailing rival, General Growth
Properties.
The real estate company said its bid totals $7 billion to creditors and
about $3 billion to General Growth shareholders. Simon also said its
offer might be amended so shareholders could receive Simon stock
instead of cash.
The offer amounts to $9 per share for the Chicago real estate company,
which filed for Chapter 11 bankruptcy protection last year. Parts of
its plan to restructure $10.25 billion in debt related to 103
properties were approved in December.
Simon submitted its offer to the nation's second-largest mall owner
Feb. 8. But it made the offer public Tuesday, claiming it had not yet
received a "substantive response" from executives.
A spokesman for General Growth, which owns or manages more than 200
U.S. malls, had no immediate comment on the deal.
Simon, the nation's largest mall owner, is based in Indianapolis and
owns more than 380 properties.
Its shares rose 23 cents in premarket trading to $72.23.
Big US Towers Going Cheap in
Distressed Market
NYTIMES
By THE ASSOCIATED PRESS
Filed at 3:22 p.m. ET
May 20, 2009
NEW YORK (AP) -- The 40-story skyscraper sits on a prime corner in the
country's wealthiest commercial market, steps from the Museum of Modern
Art and a few blocks from Rockefeller Center and Central Park.
It recently sold for $100,000.
The 1330 Avenue of the Americas building -- which sold for close to
$500 million three years ago -- was auctioned last month for the
minimum to a Canadian pension fund unit after owner Harry Macklowe
defaulted on a $130 million loan.
A month before that, the John Hancock Tower -- Boston's tallest
skyscraper -- sold at auction for just over $20 million. The 33-story
Equitable Building in downtown Atlanta is set to go up for auction next
month; its owners owe more than $50 million to the bank and have only
half of the building leased.
Loan defaults in the worst commercial real estate market in decades
have created tens of billions worth of distressed properties across the
nation, sometimes forcing cut-rate auctions of landmark skyscrapers.
Developers are falling behind on mortgages as tenants leave and can
find no financing to cover payments, analysts say.
So they are selling skyscrapers at a drastic discount, with the
condition that the new buyer take on the enormous amounts of debt
connected to the properties.
''Just imagine in a residential market, if there weren't 80 percent
loans available for everyone. If everyone had to buy their houses in
cash, the values of houses would plummet everywhere,'' said Dan Fasulo,
a managing director at Real Capital Analytics. ''That's happening on a
massive scale on the commercial side.''
The Hancock Tower and the Sixth Avenue building are the first of a wave
of foreclosures and auctions expected in the next year that will slash
sale values of formerly prime real estate, analysts say.
''This is a train wreck that's coming in the large office towers,''
said Matthew Haines, chairman of the Propertyshark.com real estate Web
site.
Real Capital Analytics, which tracks commercial real estate
transactions, counted over $86 billion worth of distressed properties
in the country as of April, over $6 billion in Manhattan.
In New York City, addresses in ''serious jeopardy,'' Fasulo says,
include a 23-story Moinian Group skyscraper across from the New York
Public Library that sold for $160 million two years ago, and an office
building a few blocks away on Fifth Avenue that Moinian and Goldman
Sachs' Whitehall group bought two years ago.
Several construction sites that have shut down are also facing
foreclosure threats without new financing, like a hotel-condo project
with a Robert De Niro-backed Nobu restaurant under construction in
lower Manhattan.
Many of the towers that are likely to go up for sale were bought at
inflated prices during the boom three to five years ago and could lose
over half their value at sale, analysts said.
Macklowe bought the Sixth Avenue building in 2006 for $498 million,
taking out $130 million in short-term financing known as mezzanine
loans that bridged the gap between the equity side and the debt side.
The loan was sold to Cadim, Canada's largest pension fund, and
transferred to the subsidiary Otera Capital. Otera took over the loan
and the tower's $240 million mortgage. The building, in the middle of
the country's most lucrative commercial district, is two-thirds leased;
its most prominent tenant is the Financial Times newspaper, sporting a
pink `FT' logo on its rooftop.
''We had some confidence that the building is a good building, and with
patience we would be OK,'' said Marie Giguera, an Otera vice president.
Macklowe Properties didn't return calls for comment.
The Hancock Tower lost half its market value after its auction in March
from former owner Broadway Partners, a partnership of Normandy Real
Estate Partners and Five Mile Capital Partners.
The 60-story tower was bought in 2006 by Broadway Partners, which
invested billions into office towers around the country in the past few
years. The company often relied on financing from now-bankrupt Lehman
Bros.
Normandy and Five Mile -- which had stakes in some of Broadway
Partners' debt -- took on $640 million in debt, valuing the building at
$660 million.
The building sold at a far steeper discount than the average drop in
commercial prices in the Boston area, said David Geltner, research
director at the Massachusetts Institute of Technology Center for Real
Estate.
The center said last week that commercial property sales in the first
quarter fell by 6 percent from the end of last year, and were down 21
percent down from the same period a year ago. And on Wednesday, the
National Association of Realtors said its index of commercial brokerage
activity fell almost 13 percent from a year ago.
Sales volume is ''historically low. It has never been this low. It has
never even been half this low,'' Geltner said.
The only major property sales that are likely in the next several
months, analysts say, are distressed properties with delinquent loans.
''No healthy owner in their right mind would try to sell a property in
this environment,'' said Fasulo. He said devalued sales of skyscrapers
represent ''a trickle right now. It will turn into a flood over the
next 12 months.''
General Growth Properties Files for
Bankruptcy
NYTIMES
Michael J. de la Merced
April 16, 2009, 2:34 am
Update | 6:50 a.m. General Growth Properties, one of the largest
mall operators in the nation, filed for bankruptcy early Thursday
morning in one of the biggest commercial real estate collapses in
United States history.
Despite bargaining for months with its creditors, General Growth faced
increasing pressure to handle its more than $25 billion in debt,
largely in the form of short-term mortgages that will come due by next
year. The company has been severely wounded by the recession, which has
wreaked havoc upon the retailers who inhabit its more than 200 malls in
44 states. Many stores have shuttered, depriving mall operators like
General Growth of revenue.
The filing by the Chicago-based company, made in federal bankruptcy
court in Manhattan, included most of the company’s malls, which will
continue to operate. General Growth’s reorganization efforts will
likely focus on selling off properties. It has already suspended its
stock dividend, cut its workforce by 20 percent and stopped virtually
all new development.
“Our operational model is sound,” Thomas H. Nolan Jr., the company’s
president and chief operating officer, said on a conference call early
Thursday morning, citing “the unprecedented disruption in the real
estate financing markets and the need to extend maturing debt” as the
reason the company filed.
“We made extensive efforts to modify existing maturing debt outstide of
bankruptcy,” he added.
What began as a crisis in residential real estate has since seeped into
the commercial real estate market, as landlords of retail and office
space face rising numbers of vacancies. Analysts expect many of these
companies to struggle as the recession forces steep cuts in consumer
spending and employment rolls.
As the second-biggest operator of malls in the nation, behind only the
Simon Property Group, General Growth’s troubles have been closely
watched by the real estate and retail industry for months. Founded in
1954 and grown through a series of acquisitions — topped by a $12.6
billion deal for the Rouse Company in 2004 — the company’s huge retail
presence has served as a barometer for the ails bedeviling the American
retail market.
As more stores have closed, mall vacancies are at their highest point
in almost a decade, according to Reis, a research company, which said
the vacancy rate at the end of 2008 was 7.1 percent, compared with 5.8
percent at the end of 2007.
That has left many of the roughly 1,500 malls in the United States
groping for a solution — any solution — to their woes. Some have
converted retail space into office space. Still others have drastically
lowered rents for prized tenants, willing to cut deals to simply keep
earning revenue. Some have simply gone dark.
Shares in General Growth, which closed on Wednesday at $1.05, have
fallen 97 percent over the past 12 months.
General Growth’s filing also marks a humbling of the Bucksbaum family,
which grew the company from a family grocery business in Marshalltown,
Iowa into a powerhouse of retail shopping in the Midwest. It still
holds about a 25 percent stake in the company, and John Bucksbaum, an
avid cyclist, remains its chairman after having served as its chief
executive.
Few analysts dispute the quality of General Growth’s malls, which
include the Ala Moana Center in Honolulu, Water Tower Place in Chicago
and the Grand Canal Shoppes at the Venetian in Las Vegas. But its
undoing was the mounting pile of short-term mortgages the operator used
to expand. That financing strategy was devised by its longtime chief
financial officer, Bernard Freibaum, who was dismissed last October.
Since then, the mall owner has pleaded with holders of $2.25 billion in
bonds to hold off on demanding payment as it sought to reorganize its
debt outside of a bankruptcy filing. But bondholders grew increasingly
impatient as bond maturities continued to mount and denied General
Growth an abstention from payments for the rest of the year.
The company said in its statement that it has secured a commitment for
$375 million in bankruptcy financing from Pershing Square Capital
Management, the hedge fund that owns more than 25 percent of the
company through its holdings of shares and swap contracts. That
financing must be approved by a bankruptcy court judge.
William A. Ackman, the head of Pershing Square, told Bloomberg
Television last month that he foresaw an “imminent” bankruptcy filing
by the company.
Among the companies listed as General Growth’s 100 largest unsecured
creditors are Eurohypo, a unit of Germany’s Commerzbank that holds $2.6
billion worth of loans; Wilmington Trust and the Bank of New York
Mellon representing several classes of bonds; casinos including
Mandalay Bay and the Venetian; and an assortment of retailers like
Sephora, Guess?, Borders and Macys.
In its bankruptcy filing, General Growth said that it sought permission
to retain a bevy of advisers, including the investment bank Miller
Buckfire, the turnaround consulting firm AlixPartners and the law firms
Weil, Gotshal & Manges and Kirkland & Ellis. The document was
signed by Marcia L. Goldstein, the chair of Weil’s well-known
bankruptcy practice.
Sam Zell’s Empire, Underwater
in a Big Way
NYTIMES
By CHARLES V. BAGLI
February 7, 2009
It was, for a brief shining moment, the real estate deal of the
century.
In 2007, Sam Zell, the billionaire Chicago investor, sold a portfolio
of 573 properties he had assembled over three decades, Equity Office
Properties Trust, to the Blackstone Group for $39 billion. It was the
largest private equity deal in history, but Blackstone did not stop
there: it immediately flipped hundreds of the buildings for $27 billion.
Today, the wreckage of those purchases is strewn across the country,
from Southern California to Austin, Tex., to Chicago to New York. Many
of the 16 companies that bought Equity Office buildings are now stuck
with punishing debt, properties whose values are plummeting and
millions of feet of office space they cannot fill.
Few deals better exemplify the excesses of the commercial real estate
boom than the dismemberment of the Equity Office empire, and fewer
still better underscore their bitter consequences.
Buyers purchased buildings at what, in retrospect, were vastly inflated
prices. Lenders provided lavish, even excessive, financing based on
unrealistic expectations of rising rents. And now that values are
tumbling, vacancy rates are rising and credit has become impossibly
tight, many on both sides are struggling against default, foreclosure
or bankruptcy.
The impact could ripple beyond the companies that bought Equity Office
buildings and the investment banks that financed them. If the owners
cannot make their loan payments, it could create a financial crisis for
the pension funds, hedge funds and insurance companies that hold
securities based on Equity Office mortgages.
The list of Equity Office buyers reads like a Who’s Who in American
real estate. In Stamford, Conn., RFR Properties, a partnership headed
by Michael Fuchs and Aby Rosen, who owns Manhattan landmarks like Lever
House and the Seagram Building, spent $850 million to buy seven Equity
Office buildings that analysts say are now worth less than their
mortgages.
In Los Angeles, the founder of Maguire Properties, one of the largest
commercial landlords in Southern California, was forced to step down
last year as the company struggled with crushing debt from buying 24
Equity Office buildings.
And in New York, the real estate mogul Harry B. Macklowe lost seven
Equity Office towers he bought from Blackstone, along with much of his
empire, after he was unable to refinance the $7 billion in short-term,
high-interest debt he used to buy them.
“Those who bought from Blackstone have not fared well at all,” said
Michael Knott, a real estate analyst at Green Street Advisors.
“Blackstone was a huge winner at the time, although the value of what
they still hold has fallen probably 20 percent.”
Mr. Zell, who became chairman and chief executive of the Tribune
Company after selling Equity Office, amassed his supersize real estate
portfolio over many years. But the deal to sell the properties to
Blackstone, the big private equity firm run by Stephen A. Schwarzman,
occurred with lightning speed and what one executive who participated
in the transaction called, “short-form due diligence.”
Blackstone’s purchase of Equity Office in February 2007 began a series
of other record-breaking deals in Stamford; San Francisco; Portland,
Ore.; Orange County, Calif., and Chicago, as Blackstone quickly sold
about 70 percent of the portfolio to 16 other companies. The company
still owns 105 Equity Office properties.
“These were aggressive acquisitions under the best of circumstances,”
said Paul E. Adornato, a senior real estate analyst at BMO Capital
Markets.
The buyers found lenders only too willing to finance as much as 90
percent or more of the purchase price, even as profit margins shrank,
on a bet that rents and values would continue to rise. The investment
banks, including Morgan Stanley, Wachovia, Goldman Sachs, Bear Stearns
and Lehman Brothers, in turn collected their fees as they packaged the
loans as securities and sold them to investors.
“It certainly defined a period of time where debt was readily available
in large quantities at low prices,” said Robert S. Underhill, who heads
the capital transaction group at Shorenstein Properties L.L.C.
Not everyone who bought Equity Office buildings is in dire shape.
After looking at Blackstone’s Equity Office portfolio in many cities,
Shorenstein settled on Portland, where it bought 46 buildings for $1.1
billion. It was the one place where price, initial returns and
potential for growth made the most sense, Mr. Underhill said.
But elsewhere, problems with Equity Office properties have spread like
a virus, weakening and even paralyzing major real estate developers.
In Stamford, the crisis on Wall Street and the consolidation of
financial services has weakened the market, undermining the RFR
Properties’ effort to raise rents at its seven Equity Office buildings
by 15 percent. The purchase price of $850 million, roughly $515 a
square foot, was close to a record for Stamford.
RFR’s Equity Office buildings are now worth less than its mortgages,
said Dan Fasulo, a managing director of Real Capital Analytics, a real
estate research firm. But the company has not defaulted on its loans.
“Some of the rents they projected won’t come to fruition for many
years,” Mr. Fasulo said.
RFR Properties did not return calls seeking comment.
The market has declined drastically in Chicago as well, and the vacancy
rate is climbing at some Equity Office buildings owned by the real
estate giant Tishman Speyer, brokers say. The company, which controls
Rockefeller Center and properties in China, India and Brazil, bought
six Equity Office buildings in Chicago for $1.7 billion. The company
almost immediately tried to sell three of its new buildings, but
received acceptable offers for only one, which sold for $145 million in
2007. Tishman declined to comment.
In New York, Mr. Macklowe made a characteristically aggressive gamble
when he bought seven Midtown buildings from Blackstone for more than $6
billion, doubling the size of his real estate empire. He put down a
mere $50 million, while lining up $7 billion in short-term financing
from Deutsche Bank and the Fortress Investment Group for the
acquisition.
But after the rollicking real estate boom came to an end, Mr. Macklowe
was unable to get permanent financing. He narrowly avoided personal
bankruptcy and was forced to turn over the seven towers and other
properties, including his jewel, the General Motors building, to
lenders.
Deutsche Bank recently sold two of the Macklowe buildings in New York
to Shorenstein Properties for an average of $818 a square foot, or 25
percent less than the $1,100 a square foot that Mr. Macklowe paid. Real
estate brokers say two other buildings from that portfolio will
probably sell for a discount of at least 60 percent.
Mr. Macklowe’s company, Macklowe Properties, declined to comment.
In Los Angeles, Maguire Properties was already laboring under heavy
debts when the company paid Blackstone $2.87 billion for 24 buildings,
22 of them in Orange County, the center of the subprime mortgage
industry. From the beginning, the loan payments for the Equity Office
buildings exceeded the monthly revenue from the properties, according
to the company’s regulatory filings.
The company’s vow to raise rents by 25 percent at its newly acquired
buildings dissolved quickly as the vacancy rate in Orange County
swelled to 16 percent, from 7 percent in 2006, making it harder to make
mortgage payments. Maguire sold a number of its Equity Office
buildings, some at a loss, and the board forced its chairman and
founder, Robert F. Maguire III, to step down.
“It was the straw that broke the camel’s back in terms of what it did
for their operating results and their balance sheet,” said Mr. Knott of
Green Street Advisors.
In Austin, when the Thomas Properties Group formed a partnership with
the California teachers’ pension fund and Lehman Brothers, which was
also a lender in the deal, to buy 10 Equity Office buildings downtown
and in the surrounding suburbs for $1.15 billion, it instantly became
the biggest commercial landlord in town.
Like many of the other deals, it was highly leveraged and dependent on
rising rents. The problem is that rents are now declining in Austin,
particularly in suburban areas, where vacancy rates have climbed to
14.4 percent as several new buildings are coming on line without
tenants.
In November, Thomas filed a motion in the Lehman bankruptcy case saying
it would “run out of cash” in January. On behalf of the partnership,
Thomas asked the court to compel Lehman to make good on its commitment
to provide a $100 million revolving loan, or allow the partnership to
raise new financing elsewhere. The money, it said, was to lease,
maintain and market the buildings.
Without additional financing, the motion said, there could be a series
of defaults “leading to the threat of foreclosures and bankruptcy.”
The motion has been postponed, but the partnership did make an $18
million property tax payment that was due last month in Austin “in
cooperation” with Lehman. The partnership is still facing significant
liquidity problems.
“They’re going to face a difficult road because the buildings in the
suburbs are getting more and more vacant,” said Volney Campbell,
co-managing partner of HPI Corporate Services in Austin, a real estate
company.
“It was the largest single transaction that’s ever occurred in Austin.
Considering where we are now, it will stay that way for a while.”
General Growth to Sell Retail
Centers in 3 Cities
NYTIMES
By THE ASSOCIATED PRESS
Filed at 5:14 p.m. ET
December 19, 2008
WASHINGTON (AP) -- A troubled mall operator is putting prominent retail
centers in Boston, New York and Baltimore up for sale in a desperate
attempt to shore up its finances.
Chicago-based General Growth Properties Inc. has hired a New York-based
commercial real estate firm to put the well-known retail centers up for
sale. New York brokerage DTZ Rockwood LLC said Thursday it has
been retained to sell off New York's South Street Seaport, Boston's
Faneuil Hall Marketplace and Baltimore's Harborplace & The Gallery,
all three of which are prominent tourist destinations.
The three properties combined generated about $300 million in retail
sales for the year ending Sept. 30, according to DTZ's marketing
materials, which bill the properties as an ''unprecedented investment
opportunity.''
All three locations were developed by the Maryland-based Rouse Co. as
part of major urban renewal efforts in the 1970s and 1980s. General
Growth took over all of Rouse's assets as part of a $7.2 billion
acquisition in 2004. The potential sale, however, comes at a time
when there are few buyers for real estate of any kind. Plus, with the
U.S. economy sinking, rents and vacancies at shopping centers and
office buildings are expected to suffer next year.
Worse still, about $36 billion of commercial real estate debt will
expire next year, and about $55 billion of debt on average will roll
over annually by 2012.
All three properties are at or near their cities' waterfronts and were
developed by James Rouse, who gained widespread acclaim for leading
urban development efforts. Rouse, who died in 1996, also developed the
planned city of Columbia, Md. General Growth, the country's
second-largest mall owner is saddled with huge amounts of debt it took
on during the real-estate market's boom years when it aggressively
bought up assets. Refinancing that debt has proven difficult amid a
global credit crunch.
Analysts are unsure whether new managers, installed in late October,
will be able to keep the company afloat as the recession drags on and
U.S. retailers struggle. The company last month ousted its chief
executive, president and chief financial officer and hired law firm
Sidley Austin as an adviser.
On Wednesday, General Growth received another extension on $900 million
in loans for two Las Vegas properties. Lenders agreed to place
the loans in forbearance until Feb. 12 as the Chicago company looks to
sell some of its assets or raise fresh capital to help pay upcoming
debt maturities. The mortgages cover two Las Vegas malls, Fashion
Show and Palazzo. The company is also trying to sell its Las Vegas
locations. It had received a two-week extension on the loans for the
Las Vegas properties earlier this month. Lenders for a separate senior
credit agreement inked in 2006 agreed to extend that deal until Jan. 30.
General Growth has a stake in more than 200 shopping malls in 44
states. The company's stock has lost more than 95 percent of its
value in the past six months. Its shares rose 14 cents, or 8.7 percent,
to $1.75 on Thursday, then dropped 14 cents to $1.61 in aftermarket
trading.
Meanwhile, casualties among retailers are rising. Circuit City Stores
Inc. and KB Toys Inc. have filed for Chapter 11 bankruptcy protection
in recent weeks.
Richard D. Hastings, a strategist with Global Hunter Securities,
expects total retail sales will fall as much as 8 percent for the
November through January period. ''Consumer demand is much less than
most of us understood even in September,'' said Hastings, who says the
spending malaise is unlikely to hit bottom until the second half of
2010. Michael P. Niemira, chief economist at the International
Council of Shopping Centers, expects sales at stores open at least a
year will fall as much as 1 percent for the November and December
period, but fears the decline could even be steeper. That would be the
worst performance for the holidays since at least 1969 when the index
began.
The only holiday period that came even close was 2002, which posted a
meager 0.5 percent gain.
Real Estate
As Vacant Office Space Grows, So Does Lenders’
Crisis
NYTIMES
By CHARLES V. BAGLI
January 5, 2009
Vacancy rates in office buildings exceed 10 percent in virtually every
major city in the country and are rising rapidly, a sign of economic
distress that could lead to yet another wave of problems for troubled
lenders.
With job cuts rampant and businesses retrenching, more empty space is
expected from New York to Chicago to Los Angeles in the coming year.
Rental income would then decline and property values would slide
further. The Urban Land Institute predicts 2009 will be the worst year
for the commercial real estate market “since the wrenching 1991-1992
industry depression.”
Banks and other financial companies have not had the problems with
commercial properties in this recession that they have had with
residential properties. But many building owners, while struggling with
more vacancies and less rental income, will need to refinance
commercial mortgages this year.
The persistent chill in lending from banks to the credit markets will
make that difficult — even for borrowers who are current on their
payments — setting the stage for loan defaults.
The prospect bodes ill for banks, along with pension funds, insurance
companies, hedge funds and others holding the loans or pieces of them
that were packaged and sold as securities.
Jeffrey DeBoer, chief executive of the Real Estate Roundtable, a
lobbying group in Washington, is asking for government assistance for
his industry and warns of the potential impact of defaults. “Each one
by itself is not significant,” he said, “but the cumulative effect will
put tremendous stress on the financial sector.”
Stock analysts say commercial real estate is the next ticking time bomb
for banks, which have already received hundreds of billions of dollars
in capital and other assistance from the federal government. Big banks
— like Bank of America, JPMorgan Chase and Morgan Stanley — each hold
tens of billions of dollars in commercial real estate securities. The
banks also invested directly in properties.
Regional banks may be an even bigger concern. In the last decade, they
barreled their way into commercial real estate lending after being
elbowed out of the credit card and consumer mortgage business by
national players. The proportion of their lending that is in commercial
real estate has nearly doubled in the last six years, according to
government data.
Just as home loans were pooled, then carved up and sold to investors as
securities over the last two decades, commercial property loans were
repackaged for the financial markets. In 2006 and 2007, nearly 60
percent of commercial property loans were turned into securities,
according to Trepp, a research firm that tracks mortgage-backed
securities.
Now that the market for those securities has dried up, borrowers cannot
easily roll over the loans that are coming due.
Many commercial property owners will face a dilemma similar to that of
today’s homeowners who cannot easily get mortgage relief because their
loans were sliced and sold to many different parties. There often is
not a single entity with whom to negotiate, because investors have
different interests.
By many accounts, building owners have been caught off guard by how
quickly the market has deteriorated in recent weeks.
Rising vacancy rates were expected in Orange County, Calif., a center
of the subprime mortgage crisis, and New York, where the now shrinking
financial industry dominates office space. But vacancies are also
suddenly climbing in Houston and Dallas, which had been shielded from
the economic downturn until recently by skyrocketing oil prices and
expanding energy businesses. In Chicago, brokers say demand has dried
up just as new office towers are nearing completion.
“The economic recession is so widespread that we believe virtually
every market in the country will see a rise in vacancy rates of between
2 and 5 percentage points by mid-2009,” said Bill Goade, chief
executive of CresaPartners, which advises corporations on leasing and
buying office space.
There is no relief in sight for Orange County, where subprime lenders
and title companies once dominated the market but are now shedding
space because their business has dried up, and big banks are now
shrinking because of a wave of mergers. The vacancy rate has soared
from 7 percent at the end of 2006 to 18 percent, a rate that the Tampa
area should match this month, local real estate brokers say.
In New York, where rents had risen the highest as financial companies
gobbled up office space, vacancy rates are floating above 10 percent
for the first time in years.
What looked like the worst possible case a few weeks ago for Chicago
now appears to be the most likely outcome, said Bill Rogers, a managing
director at Jones Lang LaSalle, a real estate broker. The vacancy rate,
which was fairly stable at 10 percent, is now rising quickly and could
hit 17 percent in 2009, he said. “A lot of companies are trying to shed
excess space ahead of what is expected to be a worse market in 2009,”
Mr. Rogers said.
Newmark Knight Frank, a real estate broker, expects the vacancy rate in
Dallas to rise to 19 percent this year, from 16.3 percent.
Houston, like Dallas, held up while many other cities were showing the
strains of an economic slowdown. But job growth and the brisk business
of oil and gas exploration have come to an abrupt halt.
Vacant or unfinished shopping centers dot the highways. Among the 8.4
million square feet of office space under construction or recently
completed in the metropolitan area, 80 percent has not been leased. As
a result, the vacancy rate is 11 percent and rising.
“I see a wave of troubled assets coming out of Texas in the near
future,” said Dan Fasulo, managing director of Real Capital Analytics,
a real estate research firm.
Effective rents, after free rent and other landlord concessions, have
already started to fall and are expected to decline 30 percent or more
across the country from the euphoric days of the real estate boom,
according to real estate brokers and analysts.
That is making it all the more difficult for owners, who projected
ever-rising rents when they financed their office buildings, hotels,
shopping centers and other commercial property. Owners typically pay
only the interest on loans of 5, 7 or 10 years and refinance the big
principal payments necessary when the loans come due.
Without new financing, owners will have few options other than to try
to negotiate terms with their lenders or hand over the keys to banks
and bondholders.
Among commercial properties, the most troubled have been hotels and
shopping centers, where anemic sales and bankruptcies by retailers are
leading to more vacancies and where heavily leveraged mall operators,
like General Growth Properties and Centro, are under intense pressure
to sell assets. But analysts are increasingly worried about the office
market.
The Real Estate Roundtable sees a rising risk of default and
foreclosure on an estimated $400 billion in commercial mortgages that
come due this year. In recent weeks, a group led by the New York
developer William Rudin has pleaded with Treasury Secretary Henry M.
Paulson Jr., Senator Charles E. Schumer, Democrat of New York, and
others to have the government include commercial real estate in a new
$200 billion program intended to spur lending.
Mr. DeBoer, the roundtable’s leader, said building owners are by and
large making their loan payments. It is the refinancing that is
worrisome.
Most loans, he said, were made at 50 percent to 70 percent of property
values. At the top of the market in 2006 and 2007, though, some owners
took advantage of available credit and borrowed 90 percent or more of
the value of a property, a strategy that works only in a rising market.
Since then, property values have dropped 20 percent, Mr. DeBoer said.
Where possible, owners are trying to extend loans. A lender might agree
to extend the term on a 10-year commercial mortgage, for example, if
the borrower remains current on payments and can make an equity payment
to compensate for the decline in the building’s value.
Already, $107 billion worth of office towers, shopping centers and
hotels are in some form of distress, ranging from mortgage delinquency
to foreclosure, according to a report by Real Capital Analytics.
New York, the biggest market by far, leads the pack with 268 troubled
properties valued at $12 billion. But there are 19 more cities,
including Atlanta, Denver and Seattle, with more than $1 billion worth
of distressed commercial properties.
Analysts are especially concerned about buildings like 666 Fif